Canadian Securities Lawhttps://www.stikeman.com/en-ca/rss/canadian-securities-law?utm_source=cslo-list-en&utm_medium=email&utm_campaign=clsoCanadian Securities Lawen-CA{B82CA94A-D2EC-4937-A7B8-44952A712C53}https://www.stikeman.com/en-ca/kh/canadian-securities-law/cssb-releases-proposed-canadian-sustainability-disclosure-standardsRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalCanadian Securities LawCSSB Releases Proposed Canadian Sustainability Disclosure Standards<p><strong>On March 13, 2024, the Canadian Sustainability Standards Board (“CSSB”) released </strong><a rel="noopener noreferrer" target="_blank" href="https://www.frascanada.ca/en/cssb/news-listings?tab=%7b2494BF21-A8BB-45F1-A09C-C8001CB6162A%7d"><strong>proposed Canadian sustainability disclosure standards</strong></a><strong> (the “CSSB Standards”) that are modelled after the sustainability disclosure standards developed by the International Sustainability Standards Board (“ISSB”). The Canadian Securities Administrators (“CSA”) have </strong><a rel="noopener noreferrer" target="_blank" href="https://www.securities-administrators.ca/news/canadian-securities-regulators-issue-statements-on-proposed-sustainability-disclosure-standards-and-ongoing-climate-consultation/"><strong>welcomed the launch of the consultation on the CSSB Standards</strong></a><strong> and the feedback that the CSSB receives could inform revisions to the CSA’s proposed climate-related disclosure rules (published in October 2021 but currently on hold).</strong></p> <h2>Background</h2> <p>As we noted in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-product-liability-law/csa-welcome-release-by-issb-of-global-sustainability-disclosure-standards">previous post</a>, the ISSB released its first two sustainability disclosure standards, <a rel="noopener noreferrer" target="_blank" href="https://www.ifrs.org/projects/completed-projects/2023/general-sustainability-related-disclosures/#published-documents">IFRS S1 <em>General Requirements for Disclosure of Sustainability-related Financial Information</em></a> (“IFRS S1”) and <a rel="noopener noreferrer" target="_blank" href="https://www.ifrs.org/projects/completed-projects/2023/climate-related-disclosures/#published-documents">IFRS S2 <em>Climate-related Disclosures</em></a> (“IFRS S2” and together with IFRS S1, the “ISSB Standards”) on June 26, 2023. The CSSB was formed to develop Canadian sustainability disclosure standards that align with the global baseline standards developed by the ISSB with appropriate modifications to address considerations specific to Canada.</p> <h2>CSSB Standards</h2> <p>The CSSB has used IFRS S1 as a baseline to develop “Proposed Canadian Sustainability Disclosure Standard (CSDS) 1, <em>General Requirements for Disclosure of Sustainability-related Financial Information</em>” (“CSDS 1”) and IFRS S2 as a baseline to develop “Proposed Canadian Sustainability Disclosure Standard (CSDS) 2, <em>Climate-related Disclosures</em>” (“CSDS 2”) with certain modifications to reflect Canadian circumstances.</p> <p>The CSSB has proposed that entities apply the CSSB Standards for annual reporting periods beginning on or after January 1, 2025 (which is one year later than the effective date of the ISSB Standards). In the first two annual reporting periods, Canadian entities:</p> <ul> <li>are permitted to disclose information that is limited to climate-related risks and opportunities in accordance with CSDS 2 and to apply the requirements of CSDS 1 only as they relate to the disclosure of climate-related risks and opportunities; and</li> <li>are not required to disclose their Scope 3 greenhouse gas (“GHG”) emissions</li> </ul> <p>(entities are only exempt from these requirements in their first annual reporting period under the ISSB Standards). This transitional relief has been extended to grant Canadian entities more time to prepare for adoption.</p> <p>In addition, the CSSB has prepared a consultation paper, “Proposed Criteria for Modification Framework” (the “Consultation Paper”), that describes the basis on which the CSSB would introduce changes to the ISSB Standards. The Consultation Paper provides that the CSSB will generally limit amendments to the ISSB Standards to requirements or guidance: (i) the application of which are not permitted by, or require addition, deletion or amendment to be consistent with, applicable Canadian law or regulation; and (ii) where the ISSB recognizes that different provisions or practices may apply in other jurisdictions and Canada is such a jurisdiction. Notwithstanding the foregoing, the CSSB may also make amendments to the ISSB Standards where it believes that such changes are required to serve the Canadian public interest and maintain the quality of sustainability disclosure in Canada.</p> <h2>What’s Next?</h2> <p>The CSSB plans to hold consultation sessions to identify potential implementation challenges and will continue to monitor global uptake and adoption of the ISSB Standards. It welcomes feedback on the <a rel="noopener noreferrer" target="_blank" href="https://www.frascanada.ca/en/cssb/news-listings?tab=%7b2494BF21-A8BB-45F1-A09C-C8001CB6162A%7d">CSSB Standards</a> until June 10, 2024.</p> <p>The adoption of CSDS 1 and CSDS 2 will be voluntary until required by Canadian securities regulators.</p> <p>In response to the publication of the CSSB Standards, the CSA issued a <a rel="noopener noreferrer" target="_blank" href="https://www.securities-administrators.ca/news/canadian-securities-regulators-issue-statements-on-proposed-sustainability-disclosure-standards-and-ongoing-climate-consultation/">statement</a> on March 13, 2024 noting that “in order to become mandatory under Canadian securities legislation, the CSSB Standards must first be incorporated into a CSA rule. Once the CSSB consultation is complete and its standards are finalized, the CSA anticipate seeking comment on a revised rule setting out climate-related disclosure requirements. The CSA proposal will consider the final CSSB Standards and may include modifications appropriate for the Canadian capital markets. The CSA anticipate adopting only those provisions of the CSSB Standards that are necessary to support climate-related disclosures”.</p> <h2>U.S. Climate Disclosure Rules</h2> <p>The CSA continue to monitor and assess related international developments, including the United States Securities and Exchange Commission’s (“SEC’s”) final climate-related disclosure rules that were approved on March 6, 2024 (the “U.S. Climate Disclosure Rules”).</p> <p>The U.S. Climate Disclosure Rules require registrants, including foreign private issuers, to disclose extensive climate-related information in their registration statements and annual reports, including but not limited to: (i) material climate-related risks; (ii) activities taken to mitigate or adapt to such risks; (iii) information about the board’s oversight of climate-related risks and management’s role in managing material climate-related risks; and (iv) information on any climate-related targets or goals that are material to the registrant’s business, results of operation or financial condition. Certain larger registrants must also disclose material Scope 1 and/or Scope 2 GHG emissions on a phased-in basis; however, the SEC has removed the requirement to disclose Scope 3 GHG emissions from the final rules. Whether the CSA follow the CSSB’s or the SEC’s approach with respect to the disclosure of Scope 3 GHG emissions remains to be seen.</p> <p>Of note, the U.S. Climate Disclosure Rules do not apply to Canadian issuers that are eligible to report under the Multijurisdictional Disclosure System (MJDS).</p> <p>While the SEC scaled back the final rules from the initial proposal significantly in a number of areas, many petitions have been filed either challenging the SEC’s authority to adopt the U.S. Climate Disclosure Rules or claiming such rules do not go far enough. It is therefore unclear whether registrants will be required to comply with these rules or if the timeline for adoption will be altered.</p> <p>For more information, see <a rel="noopener noreferrer" target="_blank" href="https://www.sec.gov/files/rules/final/2024/33-11275.pdf">The Enhancement and Standardization of Climate-Related Disclosures for Investors</a> and the related <a rel="noopener noreferrer" target="_blank" href="https://www.sec.gov/files/33-11275-fact-sheet.pdf">SEC fact sheet</a>.</p>26-Mar-2024 07:40:00{5055E3A5-3F0C-4864-A563-36CB16DF95B4}https://www.stikeman.com/en-ca/kh/canadian-ma-law/public-safety-canada-updates-guidance-on-forced-and-child-labour-reportingKeith R. Chatwinhttps://www.stikeman.com/en-ca/people/c/keith-r-chatwinAndrew S. Cunninghamhttps://www.stikeman.com/en-ca/people/c/andrew-s-cunninghamBrendan Kennedyhttps://www.stikeman.com/en-ca/people/k/brendan-kennedyIan Trimblehttps://www.stikeman.com/en-ca/people/t/ian-trimbleCanadian M&A LawCanadian Securities LawCorporations & Commercial Law UpdateCanadian Mining LawCanadian Employment, Labour & Pension LawPublic Safety Canada Updates Guidance on Forced and Child Labour Reporting<p><strong>On March 5, 2024, Public Safety Canada made changes to the </strong><a rel="noopener noreferrer" target="_blank" href="https://www.publicsafety.gc.ca/cnt/cntrng-crm/frcd-lbr-cndn-spply-chns/index-en.aspx"><strong>guidance on reporting requirements</strong></a><strong> (“Guidance”) under the </strong><a rel="noopener noreferrer" target="_blank" href="https://www.parl.ca/LegisInfo/en/bill/44-1/S-211?view=progress"><strong><em>Fighting Against Forced Labour and Child Labour in Supply Chains Act</em></strong></a><strong>, S.C. 2023, c. 9 (“the Act”) revising its original December 2023 guidance (discussed in our </strong><a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-ma-law/government-of-canada-issues-key-guidance-on-forced-and-child-labour-reporting"><strong>previous post</strong></a><strong>)</strong><strong>. </strong></p> <h2>Key Changes to the Guidance</h2> <p>The changes to the Guidance include:</p> <ul> <li><strong>Changes to the guidance on which entities must report: </strong>the updated guidance states that “Reporting requirements are for entities producing goods in Canada or elsewhere or importing goods produced outside Canada. Reporting requirements are also for entities controlling other entities engaged in these activities.” Notably, there is no longer a reference to “selling” or “distributing” goods. Although presumably intended to clarify which entities must report, the Guidance now stands in contrast with the underlying statutory obligation, which remains unchanged and requires entities “selling” or “distributing” goods in Canada or elsewhere to report.</li> <li><strong>Clarification on the reporting obligations of subsidiaries: </strong>the Guidance states that subsidiaries must determine their reporting obligations independently of their parent companies and that subsidiaries should use their own financial statements (i.e., they should not include the financials of the parent company) in determining if they meet the definition of “entity” under the Act.</li> <li><strong>Clarification of the length requirement: </strong>the 10-page limit set out in the original Guidance has been changed to a recommendation rather than a requirement. The 100MB maximum size and requirement to submit as a pdf is unchanged.</li> <li><strong>Guidance on use of the questionnaire in preparing the report: </strong>previously, the Guidance had stated that the “exact same information and structure provided through the questionnaire” could be used to prepare the report. This has been removed from the updated Guidance, and it is now only recommended that the questionnaire be used as a resource when preparing the report.</li> <li><strong>Clarification on uploading bilingual reports: </strong>if an entity chooses to file in both official languages, it should upload two separate pdfs.</li> <li><strong>Clarification on timing of posting on website: </strong>the May 31 deadline applies only to submission to Public Safety Canada and entities should publish their reports on their websites “at their earliest convenience following submission”.</li> <li><strong>Clarification on applicability to Crown Corporations: </strong>the updated Guidance clarifies that provincial and municipal institutions are not considered government entities, but that some non-federal Crown Corporations may meet the definition of “entity” and may therefore have corresponding reporting obligations.</li> </ul> <h2>What Should Entities Be Doing?</h2> <p>Corporations, trusts, partnerships and other unincorporated organizations should be determining whether or not they are required to file under the Act. This includes non-Canadian entities that have certain connections with Canada. Entities that have filing obligations should be working to prepare and file their reports prior to the May 31, 2024 filing deadline or potentially sooner in the case of <em>Canada Business Corporations Act </em>entities with pending annual financial statement delivery obligations.</p> <p>Our team has developed several resources to assist clients in complying with the Act. Please contact the authors if you have any questions or if you need any assistance in determining your filing obligations and/or preparing and filing your report.</p>21-Mar-2024 08:46:00{A21A9848-4131-41E3-AC68-AA3E66EECB6B}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-update-guidance-on-virtual-shareholder-meetingsStikeman ElliottCanadian Securities LawCSA Update Guidance on Virtual Shareholder Meetings<p><strong>The Canadian Securities Administrators (“CSA”) provided </strong><a rel="noopener noreferrer" target="_blank" href="https://www.securities-administrators.ca/news/canadian-securities-regulators-provide-updated-guidance-on-virtual-shareholder-meetings/"><strong>initial guidance on virtual shareholder meetings</strong></a><strong> in February 2022 to: (i) assist reporting issuers in fulfilling their obligations under securities legislation; and (ii) recommend practices that facilitate shareholder participation. </strong><strong>Following a review of virtual shareholder meeting practices over the last two years and in response to concerns raised by some stakeholders regarding their experience accessing and participating in virtual-only meetings, the CSA have now have published </strong><a rel="noopener noreferrer" target="_blank" href="https://www.securities-administrators.ca/news/canadian-securities-regulators-provide-updated-guidance-on-virtual-shareholder-meetings-2/?utm_medium=email&utm_campaign=NR_20240222%20Virtual%20shareholder%20meeting&utm_source=Envoke-General-Updates&utm_term=CSA-News-Release-%2F-ACVM-Communiqu%C3%A9-de-presse&eid=067f6d0007e25ea7b474be482f2054f1"><strong>updated guidance for conducting virtual shareholder meetings</strong></a><strong>. </strong></p> <h2>CSA Guidance</h2> <p>As a result of the COVID-19 pandemic, many reporting issuers adopted, and continue to use, a virtual format for their annual shareholder meetings. The CSA’s updated guidance does not constrain the use of virtual meetings nor mandate movement to a hybrid or in-person meeting structure, however, it does provide enhanced guidance with respect to disclosure practices and improving shareholder participation.</p> <h3>Clear and comprehensive disclosure</h3> <p>In the updated guidance, the CSA remind issuers of the importance of providing clear and comprehensive disclosure in their management information circulars and proxy-related materials with respect to the logistics for accessing, participating in and voting at virtual meetings.</p> <p>Issuers should provide plain language explanations of the registration, authentication and voting processes for both registered and beneficial shareholders and regarding how to obtain assistance in the event of difficulties. The procedures for submitting or asking questions and a description of how shareholder questions will be addressed at the meeting should also be disclosed.</p> <h3>Shareholder participation</h3> <p>The CSA advise that the ease, level and quality of shareholder participation at a virtual meeting should be comparable to that which shareholders could reasonably expect if they were attending an in-person meeting. Shareholders should not require anything more than a basic level of technological proficiency. Shareholder participation can be facilitated by:</p> <ul> <li>simplifying registration and authentication procedures;</li> <li>providing shareholders with opportunities to make motions or raise points of order;</li> <li>ensuring shareholders have the ability to raise questions and provide direct feedback to management in the Q&A portion of the meeting;</li> <li>indicating where shareholder proposals will be presented and voted on at the meeting, coordinating with proponents of such proposals prior to the meeting and ensuring they are given a reasonable opportunity to speak to their proposals and respond to any questions;</li> <li>ensuring that the virtual platform’s functionality permits shareholder participation to the fullest extent possible; and</li> <li>ensuring that the chair of the meeting is experienced and knowledgeable in the platform being used for the virtual meeting.</li> </ul> <p>In addition, the CSA recommend that reporting issuers consider holding their meetings in a “hybrid” format to allow for both in-person and virtual participation.</p> <h2>Proxy Advisors and Advocacy Groups</h2> <p>Similar positions have been taken by certain proxy advisory firms and shareholder advocacy groups. <a rel="noopener noreferrer" target="_blank" href="https://ccgg.ca/policies/">The Canadian Coalition for Good Governance </a>(“CCGG”) has expressed concerns that virtual-only meetings limit shareholders’ abilities to exercise their rights and express themselves to the board of directors. The CCGG advocates for in-person attendance and recommends hybrid meetings over virtual-only meetings.</p> <p><a rel="noopener noreferrer" target="_blank" href="https://www.glasslewis.com/wp-content/uploads/2023/11/2024-Canada-Benchmark-Policy-Guidelines-Glass-Lewis.pdf">Glass Lewis</a> has indicated that hybrid meetings broadly improve shareholder rights by expanding participation to those who are unable to attend in person but believe that virtual meetings have the potential to curb the ability of shareholders to meaningfully communicate with management. Glass Lewis looks for robust disclosure in a company’s circular that assures shareholders that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting and will generally recommend voting against the chair of the governance committee where such disclosure is not provided.</p> <h2>What’s Next?</h2> <p>CSA staff will continue to monitor virtual shareholder meetings and review proxy-related materials during the upcoming proxy season and have indicated that further guidance may be issued, if required.</p>08-Mar-2024 07:58:00{6911D829-C5ED-43FB-B93B-FB8105C7142E}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-amendments-to-rules-for-public-crypto-asset-fundsAlix d'Anglejan-Chatillonhttps://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillonRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalCanadian Securities LawCSA Propose Amendments to Rules for Public Crypto Asset Funds<p><strong>The Canadian Securities Administrators (“CSA”) recently published proposed amendments to National Instrument 81-102 <em>Investment Funds</em> (“NI 81-102”) and changes to its companion policy (the “Proposed Amendments”) relating to reporting issuer investment funds that seek to invest directly or indirectly in crypto assets (“Public Crypto Asset Funds”). The proposed amendments are expected to enhance regulatory clarity by supplementing previous guidance and codifying established policies, practices and exemptive relief. They are also intended to incorporate appropriate risk mitigation measures </strong><strong>into the investment fund regulatory framework to reflect the specificities of the crypto asset class while facilitating new product development in this space.</strong></p> <h2>Background</h2> <p>The Proposed Amendments mark the second phase of the CSA’s project to implement a regulatory framework for Public Crypto Asset Funds. Whereas the first phase led to the publication of <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-release-guidance-on-public-crypto-asset-funds">guidance regarding the operations of Public Crypto Asset Funds </a>within the existing framework of NI 81-102, the second phase builds on this guidance with targeted amendments that reflect CSA priorities in this space. The third and final phase will include a public consultation concerning the development of a broader and more comprehensive regulatory framework for funds that invest in crypto assets.</p> <h2>Proposed Amendments</h2> <p>The Proposed Amendments to NI 81-102 include:</p> <ul> <li><strong>Section 1.1 (Definitions): </strong>an amendment to the definition of “alternative mutual fund” to capture mutual funds that invest in crypto assets;</li> <li><strong>Section 2.3 (Restrictions Concerning Types of Investments): </strong>amendments to: (i) permit only alternative mutual funds and non-redeemable investment funds to buy, sell, hold or use crypto assets directly, which restriction would also apply to indirect investments in crypto assets through specified derivatives; (ii) limit the types of crypto assets in which such funds may invest to crypto assets that are listed for trading on, or are the underlying interest for a specified derivative where that derivative trades on, an exchange that has been recognized by a securities regulator in Canada; and (iii) prohibit Public Crypto Asset Funds from buying or holding crypto assets that are not fungible. Related guidance would also be added to the companion policy;</li> <li><strong>Sections 2.12 (Securities Loans), 2.13 (Repurchase Transactions) and 2.14 (Reverse Repurchase Transactions): </strong>amendments to prohibit the use of crypto assets in securities lending, repurchase transactions or reverse transactions as the loaned securities, transferred securities or collateral posted in connection with these transactions, as applicable;</li> <li><strong>Section 2.18 (Money Market Fund): </strong>an amendment to clarify that a “money market fund” may not buy or hold crypto assets;</li> <li><strong>Section 6.5.1 (Holding of Portfolio Assets that are Crypto Assets): </strong>a requirement for custodians and sub-custodians that hold crypto assets on behalf of a fund (“Crypto Custodians”) to keep crypto assets in offline, “cold wallet” storage, except as needed to facilitate portfolio transactions;</li> <li><strong>Section 6.6 (Standard of Care): </strong>a requirement for Crypto Custodians to maintain insurance for crypto assets in their custody, of a type and amount that a reasonably prudent person would maintain. Related guidance would also be added to the companion policy;</li> <li><strong>Section 6.7 (Review and Compliance Reports): </strong>amendments to require Crypto Custodians to obtain and provide to funds an annual report prepared by a public accountant assessing the Crypto Custodian’s internal management and controls relating to security, availability, processing integrity, confidentiality and privacy. Related guidance would also be added to the companion policy; and</li> <li><strong>Section 9.4 (Delivery of Funds and Settlement):</strong> an amendment to permit Public Crypto Asset Funds to accept crypto assets as subscription proceeds without the need for exemptive relief.</li> </ul> <h2>Request for Comments</h2> <p>The CSA welcome feedback on any aspect of the Proposed Amendments during the comment period, which ends on April 17, 2024. They have also posed specific questions for stakeholders regarding: (i) assets that would be considered crypto assets for the purpose of NI 81-102; (ii) restrictions on investing in crypto assets; (iii) custody; and (iv) broader consultation. For more information, see <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2024-01/csa_20240118_81-102_rfc_crypto-assets.pdf">CSA Notice and Request for Comment: Proposed Amendments to National Instrument 81-102 <em>Investment Funds </em>Pertaining to Crypto Assets</a>.</p> <p>Subject to their approval, the nature of comments received and any applicable regulatory requirements, the Proposed Amendments would likely come into force approximately 90 days after their final publication date.</p>05-Mar-2024 04:51:00{34731984-26CA-4017-A10B-7A5131487296}https://www.stikeman.com/en-ca/kh/canadian-class-actions-law/pleading-breaches-of-fiduciary-duties-in-class-proceedings-court-of-appeal-keeps-the-bar-lowJenna Rumeohttps://www.stikeman.com/en-ca/people/r/jenna-rumeoCanadian Class Actions LawCanadian Securities LawPleading Breaches of Fiduciary Duties in Class Proceedings: Court of Appeal Keeps the Bar Low in Ontario<p><strong>In </strong><strong><em><a rel="noopener noreferrer" href="https://canlii.ca/t/k1wkd" target="_blank">Boal v International Capital Management Inc.</a></em></strong><strong>(“<em>Boal”</em>), the Ontario Court of Appeal (the “Court”) considered the pleading requirements for certification of a breach of fiduciary duty cause of action. In holding that it was not plain and obvious that the claim had no chance of success, the Court affirmed that <em>ad hoc</em> fiduciary relationships are amenable to certification despite inherent individualistic issues in play and provided examples of potential features of commonality in these circumstances.</strong></p> <h2>Background</h2> <p>The plaintiff was a client of two mutual fund salespersons/financial planners and the corporate entity through which they operated (collectively, the “<strong>Defendants</strong>”).</p> <p>The corporate defendant was a member of the Mutual Fund Dealers Association of Canada (the “<strong>MFDA</strong>”), and the financial planners were “Approved Persons” under the MFDA rules. The MFDA rules imposed fiduciary-like obligations on the financial planners, including, among other things, to deal fairly, honestly, and in good faith with their clients, and to address conflicts of interest in the best interests of the clients.</p> <p>The Defendants presented the plaintiff with an opportunity to invest in promissory notes in Invoice Payment Systems Corp. (“<strong>IPS</strong>”). The Defendants and their immediate family members owned 75% of the IPS shares, but did not disclose this information to the plaintiff before recommending the investment in the notes.</p> <p>The plaintiff purchased an IPS note for over $100,000, and ultimately commenced a class action for the investment losses relating to the investment in the IPS note. The plaintiff claimed, among other things, that the Defendants breached their fiduciary duties.</p> <p>The <a rel="noopener noreferrer" href="https://canlii.ca/t/jd57s" target="_blank">certification judge at the Superior Court of Justice</a> held that the plaintiff failed to make out a cause of action for breach of fiduciary duty on a <em>class-wide basis</em>, and therefore, did not satisfy the common issues and preferable procedure prongs of the certification test. The plaintiff’s other claims relied on the existence of a breach of fiduciary duty and therefore also failed.</p> <p>The <a rel="noopener noreferrer" href="https://canlii.ca/t/jmpnh" target="_blank">majority at the Divisional Court</a> upheld the decision of the certification judge, finding that the pleadings did not set out sufficient facts that would establish the indicia for <em>ad hoc</em> fiduciary relationships set out in <em>Hodgkinson v Simms, </em><a rel="noopener noreferrer" href="https://canlii.ca/t/1frpl" target="_blank">[1994] 3 S.C.R. 377</a> (“<em>Hodgkinson</em>”), namely that (i) the alleged fiduciary has scope for the exercise of some discretion; (ii) the alleged fiduciary can unilaterally exercise that discretion so as to affect the beneficiary’s legal interest; (iii) the alleged beneficiary is peculiarly vulnerable to the alleged fiduciary; and (iv) the alleged fiduciary has accepted responsibility to act in the best interests of the alleged beneficiary and in accordance with a duty of loyalty.</p> <p>The Divisional Court held that the pleadings relied solely on the MFDA rules, which were insufficient to establish a fiduciary duty, and dismissed the appeal. In dissent, Justice Sachs found that the claim did include additional facts aside from the breach of the MFDA rules, which supported a breach of fiduciary duty. Accordingly, Justice Sachs would have sent the matter back to the Superior Court for redetermination.</p> <p>The plaintiff appealed the decision of the Divisional Court to the Court of Appeal.</p> <h3>The Decision of the Court of Appeal</h3> <p>The Court found that the claim provided the basis for a cause of action for breach of fiduciary duty.</p> <p>Agreeing with Justice Sachs that the certification judge had made an error in principle by failing to consider all of the facts pled aside from the breach of MFDA rules, the Court remitted the action to the Superior Court for a fresh determination.</p> <p>Relying on <em>Hodgkinson</em> and <em>Hunt v TD Securities</em>, <a rel="noopener noreferrer" href="https://canlii.ca/t/5zqq" target="_blank">2003 CanLII 3649 (ONCA)</a>, the Court affirmed the that five relevant factors in establishing an <em>ad hoc </em>fiduciary are: (i) vulnerability; (ii) trust; (iii) reliance; (iv) discretion; and (v) governance of professional rules or codes of conduct. The Court held that the plaintiff’s pleading, read as a whole, characterized the relationship with the Defendants as “one of vulnerability, trust, and reliance”.</p> <p>The Court’s holding that it was not plain and obvious a breach of fiduciary duty claim would fail was based on a number of facts, including the following:</p> <ul> <li>the Defendants prepared and monitored financial plans and recommendations for and in the best interests of each proposed class member.</li> <li>the Defendants controlled all information concerning the IPS notes, including what to reveal to proposed class members, which rendered them vulnerable.</li> <li>the relationships between the class and the Defendants appeared to be long standing, in that the Defendants selected whom to invite to purchase IPS notes from a roster of clients.</li> <li>the Defendants exercised discretion in selecting whom to invite to invest in IPS and it was the Defendants who brought the opportunity to proposed class members.</li> <li>this was not an isolated breach, but rather numerous breaches of industry standards and professional rules from which the Defendants profited greatly.</li> <li>there was a knowledge imbalance between the class and the Defendants, and the class member’s knowledge that the Defendants were bound by professional rules created reasonable expectations and created an environment in which they were vulnerable.</li> </ul> <h3>Key Takeaways</h3> <p>As the Court has sent the plaintiff’s claim back to the Superior Court, it remains to be determined whether the plaintiff’s claim is suitable for resolution on a class-wide basis and satisfies the certification criteria beyond the cause of action criterion.</p> <p><em>Boal </em>reinforces how the bar to satisfying the reasonable cause of action criterion is a low one and highlights how regulatory standards may be considered when assessing whether financial advisors owe a fiduciary duty to their clients.</p>27-Feb-2024 04:29:00{37EDDFDF-BC54-4C32-81C8-1AA7278848BE}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-binding-dispute-resolution-framework-for-retail-client-complaintsStikeman ElliottCanadian Securities LawCSA Propose Binding Dispute Resolution Framework for Retail Client Complaints<p><strong>The Canadian Securities Administrators (“CSA”) have proposed amendments to National Instrument 31-103 <em>Registration Requirements, Exemptions and Ongoing Registrant Obligations </em>(“NI 31-103”) and changes to its companion policy to introduce a new regulatory framework (the “Proposed Framework”), under which an identified ombudservice would have authority to issue binding final decisions</strong><strong> in response to retail client complaints. The proposed amendments were published for a 90-day comment period that ends on February 28, 2024.</strong></p> <h2>Background</h2> <p>Part 13, Division 5, of NI 31-103 sets out requirements for registered firms, other than investment fund managers acting in that capacity, for handling and responding to client complaints. These generally include making an independent dispute resolution or mediation service available to clients and taking reasonable steps to ensure that the Ombudsman for Banking Services and Investments (“OBSI”) is the ombudservice made available to them. While OBSI may recommend monetary compensation up to C$350,000, it has no formal power or process to require a firm to pay a complainant. Some firms have therefore offered complainants less than the recommended amount.</p> <p>As we noted in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/obsi-joint-regulators-committee-releases-annual-report-for-2022">previous post</a>, since 2018 complainants have cumulatively received approximately C$1.6 million less than what OBSI recommended. The percentage of “low settlement” cases increases as the value of OBSI’s recommended compensation increases. At the same time, OBSI has low case withdrawal rates, which suggests that the existing dispute resolution process is one that complainants may generally find to be helpful or accessible.</p> <h2>Proposed Framework</h2> <p>The CSA have proposed a new regulatory framework, informed by their experience overseeing OBSI as well as international best practices. The Proposed Framework is intended to be fair, efficient and accessible for all parties while improving retail clients’ access to redress.</p> <p>As contemplated, the Proposed Framework would consist of an “investigation and recommendation” stage and a “review and decision” stage, both of which would be overseen by an identified ombudservice. The first stage would preserve OBSI’s current investigative process. The new, second stage would be triggered by a written objection, of the complainant or the firm, and provide for a review of the objection and the issuance of a binding final decision. While the Proposed Framework does not include a statutory right of appeal, it contemplates the availability of judicial review in appropriate circumstances.</p> <p>An “identified ombudservice” refers to an independent dispute resolution service that is incorporated as a not-for-profit entity and designated or recognized by the local securities regulator. If the Proposed Framework is implemented, the CSA anticipate that OBSI would be the ombudservice considered for designation or recognition by Canadian jurisdictions.</p> <p>While the Proposed Framework has been published for comment by the CSA, the British Columbia Securities Commission (“BCSC”) and the Autorité des marchés financiers (“AMF”) are participating in the consultation to varying extents. The BCSC is interested in stakeholder comments but is not participating in the proposal as British Columbia is considering legislative changes that may achieve similar outcomes. The AMF is participating in the proposal but by proposing to maintain the exemption applicable to firms registered in Québec from the requirements of Part 13, Division 5, of NI 31-103.</p> <p>For more information about the Proposed Framework and the consultation questions posed, please see <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-11/csa_20231130_31-103_proposed-amendments.pdf">CSA Notice and Request for Comment: <em>Registered Firm Requirements Pertaining to an Independent Dispute Resolution Service</em></a>.</p>16-Feb-2024 08:18:00{9679B315-C486-4889-9300-10C4442BB7DF}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-extends-prospectus-exemption-for-self-certified-investorsStikeman ElliottCanadian Securities LawOSC Extends Prospectus Exemption for “Self-Certified Investors”<p><strong>The Ontario Securities Commission (“OSC”) recently made </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2024-02/rule_20240208_45-508_prospectus-exemption.pdf"><strong>OSC Rule 45-508 <em>Extension to Ontario Instrument 45-507 Self-Certified Investor Prospectus Exemption</em></strong></a><strong> (the “Rule”) to extend relief granted previously in respect of Self-Certified Investors for an additional 18 months.</strong></p> <p>As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-expands-accredited-investor-exemption-to-include-self-certified-investors">previous post</a>, <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2022-10/rule_20221025_45-507_ontario-instrument-self-certified-investor.pdf">Ontario Instrument 45-507 <em>Self-Certified Investor Prospectus Exemption (Interim Class Order)</em></a> (the “Instrument”) was published in October 2022 to provide a temporary exemption from the prospectus requirement for non-investment fund issuers that have a head office in Ontario and distribute securities to Self-Certified Investors, if certain conditions are met. To qualify as a “Self-Certified Investor”, a purchaser must deliver to the issuer a completed: (i) “Confirmation of Qualifying Criteria”, confirming that the investor meets the qualifying criteria; and (ii) “Acknowledgement of Risks”, confirming that the investor has read and understood each of the statements of risks relating to the investment. The Instrument allows purchasers in Ontario who may not meet the financial thresholds or other criteria to qualify as an accredited investor to invest in issuers on a prospectus-exempt basis, provided that other criteria demonstrating financial knowledge, investment knowledge or relevant industry-specific experience are met. The Instrument was initially intended to remain in effect until the earlier of: (i) April 25, 2024, unless extended by the OSC; and (ii) the effective date of an amendment to National Instrument 45-106 <em>Prospectus Exemptions</em> that adopts a similar exemption.</p> <p>Subject to ministerial approval, the Rule will come into force on April 25, 2024, and extend the exemption provided in the Instrument until October 25, 2025.</p>15-Feb-2024 08:41:00{B31D199C-069B-4DFD-B388-1914251B4A2A}https://www.stikeman.com/en-ca/kh/canadian-securities-law/glass-lewis-and-iss-2024-canadian-benchmark-policy-guidelines-and-updatesRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalTara Lawhttps://www.stikeman.com/en-ca/people/l/tara-lawCanadian Securities LawGlass Lewis and ISS 2024 Canadian Benchmark Policy Guidelines and Updates<p><strong>Glass Lewis and Institutional Shareholder Services (“ISS”) recently published their Canadian benchmark policy guidelines and updates for the 2024 proxy season. Key updates focus on board accountability for climate-related issues, human capital management practices, cyber risk oversight, board interlocks, audit financial expert designations, clawback provisions, executive ownership guidelines, proposals for equity awards for shareholders and board diversity. </strong></p> <h2>Glass Lewis Updates for 2024</h2> <p>In addition to certain clarifying amendments, Glass Lewis has made the following changes to its <a rel="noopener noreferrer" target="_blank" href="https://www.glasslewis.com/wp-content/uploads/2023/11/2024-Canada-Benchmark-Policy-Guidelines-Glass-Lewis.pdf">benchmark policy guidelines for 2024</a>.</p> <h3>Board accountability for climate-related issues</h3> <p>In 2023, Glass Lewis introduced a new policy relating to board accountability for climate-related issues. The policy provides that Glass Lewis may recommend voting against responsible directors where companies with material exposure to climate risk do not provide thorough climate-related disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”) or where oversight responsibilities for climate-related issues are not explicit and clearly defined. While this policy was applied to the largest, most significant emitters in 2023, beginning in 2024, Glass Lewis will apply this policy to TSX 60 companies operating in industries where the Sustainability Accounting Standards Board (“SASB”) has determined that their greenhouse gas emissions represent a financially material risk.</p> <h3>Human capital management</h3> <p>In egregious cases, where a board has failed to respond to legitimate concerns with a company’s human capital management practices, Glass Lewis may recommend voting against the election of the chair of the committee tasked with oversight of the company’s environmental and/or social issues, the chair of the governance committee or the chair of the board, as applicable.</p> <h3>Cyber risk oversight</h3> <p>Glass Lewis has expanded its policy on cyber risk oversight to provide that where a company has been materially impacted by a cyber-attack, it may recommend voting against the election of the appropriate directors should it find the board’s oversight, response or disclosures concerning cybersecurity-related issues to be insufficient or not clearly outlined to shareholders.</p> <h3>Interlocking directorships</h3> <p>Glass Lewis believes that a board should be free of directors who have identifiable conflicts of interest and will generally recommend that shareholders withhold votes from directors who have interlocking relationships. The policy on interlocking directorships has been expanded to include both public and private companies. Other types of interlocking relationships are evaluated on a case-by-case basis, and multiple board interlocks among non-insiders are reviewed for evidence of a pattern of poor oversight.</p> <h3>Audit financial expert designation</h3> <p>Glass Lewis may recommend withholding votes from the audit committee chair if there is not at least one member of the audit committee who can reasonably be considered to be an “audit financial expert”. Glass Lewis has revised the criteria by which it designates a director as an “audit financial expert”, which includes experience as: (i) a chartered accountant; (ii) a certified public accountant; (iii) a former or current CFO of a public company or corporate controller with similar experience; (iv) a current or former partner of an audit firm; or (v) having similar demonstrably meaningful audit experience. Glass Lewis will consider this distinctly from “financial skills” in the skills matrix, which encompasses more generalized financial professional experience beyond accounting or audit experience.</p> <h3>Clawback provisions</h3> <p>Glass Lewis believes that clawback provisions play an important role in mitigating excessive risk-taking behaviour that may be encouraged in certain variable incentive programs. Clawback policies should allow recovery from current and former executive officers in the event of a restatement of financial results or similar revision of performance indicators upon which the awards were based. Glass Lewis has updated its guidelines to provide that effective clawback policies should provide companies with the power to recoup incentive compensation from an executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure or a material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Such power to recoup should be provided regardless of whether the employment of the executive was terminated with or without cause.</p> <p>Where a company does not follow through with recovery, Glass Lewis will assess the appropriateness of the determination on a case-by-case basis. Detailed disclosure of the rationale for the company’s decision, including any alternative measures that were pursued, should be provided and may play a role in Glass Lewis’ overall recommendation for the advisory vote on executive compensation.</p> <h3>Executive ownership guidelines</h3> <p>Glass Lewis has added a new section to its policies to formalize its approach to executive ownership guidelines. Companies should adopt and enforce minimum share ownership rules for their named executive officers and provide clear disclosure in the Compensation Discussion and Analysis section of the circular of such requirements and how outstanding equity awards are treated when determining the level of ownership. Inclusion of unearned performance-based full value awards and/or unvested/unexercised stock options when determining ownership levels without cogent disclosure may be considered problematic.</p> <h3>Proposals for equity awards for shareholders</h3> <p>Where a recipient of an equity award is also a large shareholder of the company whose vote can affect the approval of the proposal (where shareholder approval is required), Glass Lewis believes a company should strongly consider the level of approval from disinterested shareholders before proceeding with the grant. Among other things, requiring the non-vote or vote of abstention from the recipient shareholder may help avoid potential conflicts of interest and will be viewed positively during Glass Lewis’ analysis of the proposal.</p> <h2>ISS Updates for 2024</h2> <p>There are fewer changes to <a rel="noopener noreferrer" target="_blank" href="https://www.issgovernance.com/file/policy/active/americas/Canada-TSX-Voting-Guidelines.pdf?v=1">ISS' voting guidelines for the 2024 proxy season</a> than in past years.</p> <h3>Board diversity</h3> <p>As we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/iss-governance-announces-proposed-benchmark-policy-changes-for-2024">previous post</a>, ISS announced a new board diversity policy for S&P/TSX Composite Index constituents in 2022 that would apply to shareholder meetings on or after February 1, 2024. ISS has removed the transition language that provided a one-year grace period and has modified the exception to provide that an issuer will be in compliance with the policy to the extent that it has provided a formal, publicly disclosed written commitment to add at least one racially or ethnically diverse director at or prior to the next annual general meeting (“AGM”).</p> <h3>Compensation</h3> <p>ISS has updated its policy relating to individual grants to non-executive directors (“NEDs”) for companies listed on the Toronto Stock Exchange (“TSX”). ISS has removed the percentage limit on NED option grants as this no longer reflects market practice. The policy now provides that the maximum annual individual NED limit should not exceed C$150,000 across all equity compensation plans in aggregate, of which no more than C$100,000 of value may comprise stock options. ISS will vote against individual grants to NEDs that exceed the above limit. Consistent with past policy positions, shares taken in lieu of cash fees and a one-time initial equity grant upon a director jointing the board will not be counted towards the foregoing NED limit.</p> <p>Similarly, ISS has also removed the percentage limit from its policy relating to NED participation in equity-based compensation plans for TSX-listed companies. The updated policy provides that ISS will vote against an equity compensation plan proposal where the plan does not specify an annual individual NED grant limit with a maximum value of: (i) C$100,000 worth of stock options; or (ii) C$150,000 worth of shares.</p> <p>Companies listed on the Canadian Securities Exchange (“CSE”) are required to obtain shareholder approval within three years of the implementation of a rolling equity plan and every three years thereafter. As a result, such plans may not appear on a ballot for shareholder approval at the AGM following adoption, raising governance concerns. ISS has therefore revised its policy relating to venture companies’ equity-based compensation plans to add that ISS will generally vote withhold for the continuing compensation committee members (or where no compensation committee has been identified, the board chair or full board) if the company adopted an equity-based compensation plan without seeking shareholder approval at the AGM following its adoption.</p>12-Feb-2024 07:29:00{9A4244B3-6741-47AE-890F-57F4222C766B}https://www.stikeman.com/en-ca/kh/canadian-securities-law/bcsc-provides-new-guidance-on-acting-jointly-or-in-concert-for-proxy-contestsStikeman ElliottCanadian Securities LawBCSC Provides New Guidance on “Acting Jointly or in Concert” for Proxy Contests<p><strong>In its recent decision in </strong><a rel="noopener noreferrer" target="_blank" href="https://www.bcsc.bc.ca/-/media/PWS/New-Resources/Decision-and-Orders/Decisions/2023/2023-BCSECCOM-602.pdf?dt=20231222204011"><strong><em>NorthWest Copper Corp.</em></strong><strong>, 2023 BCSECCOM 602</strong></a><strong>, the British Columbia Securities Commission (“BCSC”) provided new guidance on the interpretation of “acting jointly or in concert” in the context of a proxy contest. Notably, the BCSC declined to find that certain shareholders of NorthWest Copper Corp. (“NWST”) acted jointly or in concert with respect to the solicitation of proxies in favour of a dissident slate of directors, despite the fact that a shareholder contributed to the costs of the dissident’s proxy contest and selected a nominee for the slate.</strong></p> <h2>Background</h2> <p>In August 2023, NWST applied to the BCSC for various orders related to the alleged failure of certain shareholders to comply with the early warning disclosure requirements in National Instrument 62-103 <em>The Early Warning System and Related Take-Over Bid and Insider Reporting Issues </em>and National Instrument 62-104 <em>Take-Over Bids and Issuer Bids</em> (“NI 62-104”). The early warning rules require a shareholder to publicly report when it, whether alone or with its joint actors, acquires beneficial ownership of, or control or direction over, voting or equity securities of any class, or securities convertible into voting or equity securities of any class, that together with existing holdings constitute 10% or more of the outstanding securities of that class of a reporting issuer.</p> <p>The proceedings related to a proxy contest in which a shareholder who held approximately 0.4% of the shares of NWST (“GS”) proposed to nominate alternative directors at NWST’s 2023 annual meeting of shareholders (the “AGM”). In early April 2023, GS approached a second shareholder who held approximately 3.9% of the shares of NWST (“TI”) about his concerns with NWST’s management. TI subsequently discussed the possibility of replacing one or two of the incumbent directors with a third shareholder who held approximately 8.2% of the shares of NWST (“JK”). JK expressed interest in having a representative on the board and proposed a nominee for the slate in early May 2023.</p> <p>In May 2023, GS delivered notice to NWST that he planned to nominate a competing slate of directors at the AGM, and such notice indicated that he was not acting jointly or in concert with any other person or company. NWST postponed its AGM and wrote to GS, asserting that it believed that GS was acting jointly or in concert with others and was required to disclose this fact.</p> <p>In July 2023, NWST announced a new AGM date, and GS delivered a second notice of his intention to nominate alternative directors. The new notice disclosed that the cost of any solicitation in respect of the nominees would be borne by GS and JK. NWST once again postponed the AGM and requested that GS disclose that he was acting jointly or in concert with others, which he declined to do.</p> <p>NWST alleged that GS was acting jointly or in concert with TI and JK, that the three of them together held more than 10% of the outstanding shares of NWST and that they were required to make public early warning disclosure of their joint actor status. NWST sought orders from the BCSC prohibiting the respondents from exercising voting rights attached to their shares with respect to the election of directors at the AGM, requiring that they cease trading in NWST’s shares for six months and directing GS to comply with the early warning rules.</p> <h2>Key Findings</h2> <p>Whether a person is acting jointly or in concert with another is a question of fact. While NI 62-104 does not define “acting jointly or in concert”, subsection 1.9(1) sets out circumstances in which persons will be deemed or presumed to be joint actors, including where there is an agreement, commitment or understanding to exercise voting rights jointly or in concert.</p> <p>The BCSC determined that NWST did not satisfy its onus of proving on a balance of probabilities that JK was acting jointly or in concert with GS and TI. The ruling offers the following helpful guidance:</p> <ul> <li><strong>Early warning rules apply to proxy solicitations by joint actors:</strong> the BCSC confirmed that the early warning regime and joint actor rules extend beyond the context of a take-over bid or issuer bid and apply in the context of proxy solicitations;</li> <li><strong>High threshold to establish joint actor relationships:</strong> the bar for finding that parties are acting jointly or in concert is set relatively high, as reflected in the presumption and deeming provision set out in subsection 1.9(1) of NI 62-104;</li> <li><strong>Importance of information sharing among shareholders:</strong> the free flow of information and opinion among shareholders of a public company is important. It is better to insist on sufficiently clear, convincing and cogent evidence that parties are acting jointly or in concert and take the risk that, by doing so, some groups will fly under the radar, than to allow reliance on speculation to create a climate that stifles discussion among shareholders;</li> <li><strong>Joint specific purpose:</strong> NWST was required to demonstrate that the respondents actively worked together to achieve a joint specific purpose and were not simply aligned in interest. While the shareholders had discussed their concerns about NWST’s board and management, their interactions did not constitute a plan of action or commitment to pursue it. There did not appear to be any form of mutual understanding about how each respondent would vote the shares he owned or controlled;</li> <li><strong>Acquisition trigger:</strong> if the parties are acting jointly or in concert, the early warning requirements are only triggered by the subsequent acquisition of additional shares. The formation of a group in itself does not trigger the early warning reporting obligations (although we note that if one or more members were already early warning reporters then the formation of a group would seem to require disclosure as a change in a material fact contained in the prior report); and</li> <li><strong>Proportionate remedies:</strong> to the extent that there is a breach of securities law, the remedy should be proportionate to the circumstances of the case. The right of shareholders to elect directors is of critical importance, and regulators will generally decline to disenfranchise shareholders where potential harm to investors might be addressed in another manner, such as with better disclosure.</li> </ul>09-Feb-2024 09:24:00{D7108229-E3D4-4FF2-B80A-CB632528B11D}https://www.stikeman.com/en-ca/kh/canadian-securities-law/ciro-moves-forward-with-phase-2-of-its-rule-consolidation-projectStikeman ElliottCanadian Securities LawCIRO Moves Forward with Phase 2 of its Rule Consolidation Project<p><strong>The Canadian Investment Regulatory Organization (“CIRO”) recently published for comment proposals relating to Phase 2 of its rule consolidation project (the “Rule Consolidation Project”), which is designed to bring together the rules currently applicable to investment dealers and mutual fund dealers. Phase 2 involves the adoption of rules to be retained that are unique to the Investment Dealer and Partially Consolidated (“IDPC”) or Mutual Fund Dealer (“MFD”) rules and have been assessed as not having a material impact on stakeholders.</strong></p> <p>The primary objectives of the Rule Consolidation Project are to:</p> <ul> <li>achieve greater harmonization to: (i) ensure that similar dealer activities are regulated in a comparable manner; and (ii) minimize regulatory arbitrage between investment dealers and mutual fund dealers;</li> <li>where practical and appropriate, adopt less prescriptive and more principles-based requirements to facilitate rules that are scalable and proportionate to different types and sizes of dealers and their respective business models; and</li> <li>improve access to and clarity of rules applicable to all CIRO dealer members.</li> </ul> <p>CIRO has determined that the consolidated rules will follow the organizational structure of the IDPC rules and that the rules will be developed and implemented in five phases.</p> <p>Under <a rel="noopener noreferrer" target="_blank" href="https://www.ciro.ca/news-room/publications/rule-consolidation-project-phase-1">Phase 1 of the Rule Consolidation Project</a>, published on October 20, 2023, CIRO proposed a structure for the consolidated rules, including provisions respecting rule interpretation, definitions of common application, rule exemption provisions and general standards of conduct applicable to all activities of dealers and their employees.</p> <p>The Phase 2 proposals relate to margin, debt markets and inter-dealer bond brokers and trading and generally involve the adoption of provisions from the existing IDPC rules.</p> <p>CIRO is accepting comments on the proposed rules until March 11, 2024. For more information, see <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2024-01/ciro_20240111_notice-24-0007_0.pdf">CIRO Bulletin 24-0007 <em>Rule Consolidation Project – Phase 2</em></a>.</p>26-Jan-2024 08:25:00{B4487BAE-94FB-4879-8836-2CFCCE292ECE}https://www.stikeman.com/en-ca/kh/canadian-securities-law/esg-navigation-understanding-canadas-legal-landscape-in-2024Vanessa Coiteuxhttps://www.stikeman.com/en-ca/people/c/vanessa-coiteuxRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalCatherine Grygarhttps://www.stikeman.com/en-ca/people/g/catherine-grygarCanadian Securities LawESG Navigation: Understanding Canada's Legal Landscape in 2024<p>Recently, three partners from our Montréal, Toronto and Calgary offices updated the <a href="/-/media/files/kh-general/iclg---esg-2024---stikeman-elliott.ashx">“Canada” chapter</a> of the <em>Environmental, Social & Governance Law 2024</em>, a publication by <em>International Comparative Legal Guides</em>. This chapter offers a comprehensive examination of the regulatory framework in Canada, providing detailed insights and analysis on key aspects. The following critical topics are explored:</p> <ul> <li>Setting the Scene - Sources and Overview</li> <li>Principal Sources of ESG Pressure</li> <li>Integration of ESG into Business Operations and Planning</li> <li>Finance</li> <li>Trends</li> </ul> <p>We are pleased to make this <a href="/-/media/files/kh-general/iclg---esg-2024---stikeman-elliott.ashx">19-page publication</a> available for download.</p>25-Jan-2024 09:51:00{B2624ED3-E592-4803-86F8-0B6D396A3EDB}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-announce-final-amendments-to-implement-an-access-equals-delivery-modelJeff Hershenfieldhttps://www.stikeman.com/en-ca/people/h/jeff-hershenfieldDavid Tardifhttps://www.stikeman.com/en-ca/people/t/david-tardifTara Lawhttps://www.stikeman.com/en-ca/people/l/tara-lawCanadian Securities LawCSA Announce Final Amendments to Implement an “Access Equals Delivery” Model for Prospectuses of Non-Investment Fund Reporting Issuers<p><strong>On January 11, 2024, the Canadian Securities Administrators (“CSA”) announced </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2024-01/ni_20240111_41-101_access-model-for-prospectuses.pdf"><strong>final amendments and changes to implement an "access equals delivery" model for prospectuses of non-investment fund reporting issuers</strong></a><strong> (the “Access Model”). The Access Model will allow reporting issuers and dealers to satisfy their delivery obligations by providing public electronic access to prospectuses, thereby modernizing the way in which documents are made available to investors and reducing costs associated with printing and mailing. The final amendments will come into force on April 16, 2024, provided that all regulatory and ministerial approvals are obtained.</strong></p> <h2>Background</h2> <p>As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-access-equals-delivery-model-for-prospectuses">previous post</a>, the CSA published for comment proposed amendments and changes to implement an “access equals delivery” model for prospectuses, annual financial statements, interim financial reports and related management’s discussion and analysis (“MD&A”) for non-investment fund reporting issuers (the “Proposed Access Model”) in April 2022. After reviewing the feedback received, which was generally supportive in respect of prospectuses, the CSA adopted the Access Model in respect of prospectuses, with some non-material changes to reflect certain comments and improve or clarify procedures, as discussed below.</p> <h2>Access Model</h2> <p>In a welcome development for many market participants, under the Access Model, prospectus delivery requirements will be met by providing public electronic access to a prospectus and alerting investors that the document is accessible through the System for Electronic Data Analysis and Retrieval + (“SEDAR+”).</p> <p>For a <strong>preliminary prospectus </strong>(including a<strong> preliminary </strong><strong>base shelf prospectus</strong> or a <strong>preliminary </strong><strong>base post-receipt pricing (“PREP”) prospectus</strong>), the prospectus delivery requirements will be met when the prospectus is filed, and a receipt is issued and posted, on SEDAR+.</p> <p>For a <strong>final prospectus</strong>, the prospectus delivery requirements will be met when: (i) the prospectus is filed, and a receipt is issued and posted, on SEDAR+; and (ii) a news release is issued and filed on SEDAR+ indicating that the prospectus is accessible through SEDAR+ and that an electronic or paper copy can be obtained, without charge, upon request.</p> <p>For a <strong>shelf prospectus supplement</strong> or <strong>supplemented PREP prospectus</strong>, the prospectus delivery requirements will be met when: (i) the prospectus is filed on SEDAR+; and (ii) after the prospectus is filed, or within two business days before the date the document is filed, a news release is issued and filed on SEDAR+ indicating that the shelf prospectus supplement and corresponding base shelf prospectus or supplemented PREP prospectus is, or will be within two business days, accessible through SEDAR+ and that an electronic or paper copy of the documents can be obtained, without charge, upon request.</p> <p>The Access Model will also allow for the use of marketing materials and conduct of road shows without the provision of the prospectus relating to the applicable offering, so long as such prospectus is accessible and its availability is referenced in accordance with the Access Model procedures.</p> <p>The Access Model does not apply in respect of prospectuses to distribute: (i) rights; (ii) securities by way of a medium-term note (“MTN”) program or other continuous distribution; or (iii) securities of an investment fund.</p> <p>In order to implement the Access Model, the CSA have published final amendments to National Instrument 41-101 <em>General Prospectus Requirements</em>, National Instrument 44-101 <em>Short Form Prospectus Distributions</em>, National Instrument 44-102 <em>Shelf Distributions</em> and National Instrument 44-103 <em>Post-Receipt Pricing</em> and consequential changes to the related companion policies.</p> <p>The access procedures will be substantially similar across jurisdictions; however, where most jurisdictions have structured the Access Model to satisfy the delivery requirement under securities legislation, in British Columbia, Québec and New Brunswick, the Access Model is structured as an exemption from the delivery requirement.</p> <h3>Withdrawal rights</h3> <p>Under the Access Model, a purchaser’s right to withdraw from an agreement to purchase a security may be exercised within two business days after the later of the date that: (i) access to the final prospectus is provided in accordance with the procedures outlined above; and (ii) the purchaser entered into the agreement to purchase the security.</p> <h3>Changes to Proposed Access Model</h3> <p>The CSA made the following changes to the Proposed Access Model in light of the comments received:</p> <ul> <li>language was added to clarify that while the Access Model provides alternative procedures for an issuer to provide electronic access to a prospectus, it is not mandatory;</li> <li>guidance was added to the relevant companion policies to provide that a dealer may rely on the Access Model to satisfy, or be exempt from, the requirement under securities legislation to deliver or send a prospectus;</li> <li>the companion policies were updated to provide that a request for an electronic or paper copy of the final prospectus will not affect the calculation of the period of time during which a purchaser’s withdrawal rights must be exercised;</li> <li>guidance was added to clarify that a news release containing information relevant to the applicable offering may also include information required under the Access Model (so that an additional news release is not required solely for such purpose);</li> <li>the news release requirements for shelf prospectuses and PREP prospectuses were revised to allow a forward-looking notice that the document will be accessible through SEDAR+ within two business days; and</li> <li>the two-day time limit within which an issuer or dealer must send a copy of the preliminary prospectus to a prospective purchaser has been removed.</li> </ul> <h2>Proposed Access Model for Financial Statements and MD&A</h2> <p>While the feedback for the Proposed Access Model for prospectuses was generally positive, certain stakeholders expressed concerns about the implementation of the Proposed Access Model for annual financial statements, interim financial reports and related MD&A. The CSA are considering further amendments to the Proposed Access Model to address investor protection concerns, including potential negative effects on retail investors. The CSA have indicated that they expect to publish such further amendments for a second comment period.</p>19-Jan-2024 07:00:00{AF04F9C3-4DD2-4B73-AD45-BA0231B3C1E7}https://www.stikeman.com/en-ca/kh/canadian-securities-law/amf-publishes-draft-climate-risk-management-guidelineStéphane Rousseauhttps://www.stikeman.com/en-ca/people/r/stephane-rousseauStuart S. Carruthershttps://www.stikeman.com/en-ca/people/c/stuart-s-carruthersAlix d'Anglejan-Chatillonhttps://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillonRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalCanadian Securities LawFinancial Services UpdateInsurance Law UpdateAMF Publishes Draft Climate Risk Management Guideline<p><strong>Late last year, the Autorité des marchés financiers (“AMF”), the organization that oversees Québec’s financial industry, published a draft <a rel="noopener noreferrer" target="_blank" href="https://lautorite.qc.ca/fileadmin/lautorite/consultations/lignes-directrices/2024-01-30-fin/2023nov30-LD-changements-climatiques-cons-en.pdf">Climate Risk Management Guideline</a> (the “Guideline”) which will apply to licensed insurers, financial services cooperatives, authorized trust companies and other authorized deposit institutions. Given the likelihood and potential impacts of climate-related risks, which are considered systemic, the Guideline aims to strengthen the resilience of the financial industry in general along with the financial institutions the AMF regulates.</strong></p> <h2>Background</h2> <p>Climate change could have significant consequences for the security and soundness of financial institutions as well as the financial system as a whole. In this context, the AMF developed the Guideline so that Québec financial institutions would soundly and prudently address and manage climate change risks. The Guideline incorporates the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”), the International Association of Insurance Supervisors and the Bank for International Settlements. The Guideline follows the publication in June 2022 of the AMF’s report entitled <a rel="noopener noreferrer" target="_blank" href="https://lautorite.qc.ca/fileadmin/lautorite/grand_public/publications/professionnels/rapport-changements-climatiques_en.pdf">Climate Change Risks: Measures implemented to date by financial institutions</a>.</p> <h2>The AMF’s Expectations</h2> <p>The Guideline sets out the AMF’s expectations regarding six (6) topics relating to climate change risk:</p> <ul> <li><strong>Governance:</strong> the roles and responsibilities of the members of the Board of Directors and senior management should be clearly defined so that they may assume their duties in addressing climate-related risks. The financial institution should address climate change-related impacts and the transition to a lower-carbon economy in its strategy.</li> <li><strong>Integrated risk management</strong>: the financial institution should identify and assess the potential impacts of climate-related risks and implement mitigation measures, while stating how its activities are integrated into its overall risk management and control framework.</li> <li><strong>Climate scenarios and stress testing:</strong> the financial institution should carry out climate scenario analysis to assess the impact of climate risk factors on its risk profile, business strategy and business model.</li> <li><strong>Capital and liquidity adequacy:</strong> the financial institution should maintain sufficient capital and liquidity to cover its climate risk exposures.</li> <li><strong>Fair treatment of clients:</strong> the financial institution should take into account changes in climate-related risks when designing, marketing and advertising new products or altering existing ones, so that its products deliver the benefits and features reasonably expected by different client groups. The disclosures sent to clients before, upon and after purchase of a product offered by the financial institution should address changes in climate-related risks.</li> <li><strong>Financial disclosure:</strong> the financial institution should publicly disclose the main elements of its governance, integrated risk management, and its climate scenarios and climate-related stress testing at least annually. In doing so, the financial institution should follow five principles for effective disclosure: (i) provide relevant, specific and comprehensive information; (ii) provide information that is clear, balanced and understandable for both the general public and more sophisticated stakeholders; (iii) maintain a neutral stance in its disclosure, disclosing in particular reliable, verifiable and objective information; (iv) disclose information appropriate for its size, nature and complexity; and (v) disclose consistently from one fiscal year to another. The financial institution should also disclose its greenhouse gas emissions and its targets used to manage climate-related risks and assess its performance against its targets.</li> </ul> <p>The AMF’s expectations follow the principles of <a rel="noopener noreferrer" target="_blank" href="https://www.osfi-bsif.gc.ca/eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b15-dft.aspx">Guideline B-15 of the Office of the Superintendent of Financial Institutions on Climate Risk Management</a>. This convergence reflects the objective shared by the federal and Québec regulators, i.e., to strengthen the resilience of the financial industry and financial institutions, as well as the influence of the guidelines of international organizations and task forces on the federal and Québec guidelines.</p> <p>The Guideline is notable in that it sets out its expectations for the fair treatment of clients. This reflects the AMF’s twofold mission to regulate the financial industry and oversee consumer protection.</p> <h2>Additional Information</h2> <p>The Guideline has been published as a draft for a consultation period that will end on January 30, 2024.</p>17-Jan-2024 09:19:00{28818F49-54ED-422D-B1A1-D53E70C7A616}https://www.stikeman.com/en-ca/kh/canadian-ma-law/government-of-canada-issues-key-guidance-on-forced-and-child-labour-reportingKeith R. Chatwinhttps://www.stikeman.com/en-ca/people/c/keith-r-chatwinAndrew S. Cunninghamhttps://www.stikeman.com/en-ca/people/c/andrew-s-cunninghamBrendan Kennedyhttps://www.stikeman.com/en-ca/people/k/brendan-kennedyIan Trimblehttps://www.stikeman.com/en-ca/people/t/ian-trimbleCanadian M&A LawCanadian Securities LawCorporations & Commercial Law UpdateCanadian Mining LawGovernment of Canada Issues Key Guidance on Forced and Child Labour Reporting<p><strong>On December 20, 2023, the Government of Canada issued long-awaited </strong><a rel="noopener noreferrer" target="_blank" href="https://www.publicsafety.gc.ca/cnt/cntrng-crm/frcd-lbr-cndn-spply-chns/index-en.aspx"><strong>guidance on reporting requirements</strong></a><strong> (“Guidance”) under the </strong><a rel="noopener noreferrer" target="_blank" href="https://www.parl.ca/LegisInfo/en/bill/44-1/S-211?view=progress"><strong><em>Fighting Against Forced Labour and Child Labour in Supply Chains Act</em></strong></a><strong>, S.C. 2023, c. 9 (“the Act”). The Guidance addresses some of the interpretation questions discussed in our </strong><strong><a href="https://www.stikeman.com/en-ca/kh/canadian-ma-law/canadian-legislation-on-forced-and-child-labour-in-global-supply-chains-takes-effect">previous posts</a></strong><strong> and also fleshes out the submission process – notably by unveiling an online questionnaire that all entities that are required to report will have to complete. </strong></p> <p>In this post we look at some of the more significant aspects of the Guidance and how they may guide businesses in preparing their reports. While some questions remain, the Guidance has significantly clarified a number of key issues, as discussed below.</p> <h2>Application of the Act</h2> <h3>Guidance relating to the determination of entity status</h3> <p>In assessing whether an organization has a “place of business in Canada”, “does business in Canada” or “has assets in Canada”, issuers should make reference to the ordinary sense of these terms and to the criteria applied by the Canada Revenue Agency. Importantly, doing business in Canada does not require a physical presence in Canada.</p> <p>With respect to the monetary and numeric thresholds (“Size Thresholds”) for assets, revenue and employees, the Guidance suggests that the Government is expecting each entity to report on a consolidated basis (i.e. including entities that it controls and excluding any entity that controls it).</p> <p>The Guidance confirms that the Size Thresholds apply to the organization’s worldwide assets, revenue and employees and specifies that assets are “gross” rather than “net”, while noting that employees exclude independent contractors.</p> <h3>Guidance on whether an entity is a reporting entity</h3> <p>Under section 9 of the Act, an entity is a reporting entity if it:</p> <ul> <li>Produces, sells or distributes goods in Canada;</li> <li>Imports into Canada goods produced outside Canada; or</li> <li>Controls an entity engaged in any of the above.</li> </ul> <p>With respect to the application of the Act to services businesses, the Guidance states that the terms “selling, distributing and importing … are not intended to capture services that solely support the production, sale, distribution or importation of goods.” Examples of such services are marketing, administrative services, financial services and software services.</p> <p>“Goods” is to be given its ordinary meaning within the subject of trade and commerce and “importing goods” does not include those who buy from a third party who is considered the importer for the purposes of the <em>Customs Act</em>.</p> <p>The Guidance also acknowledges that there is no prescribed minimum value of goods that an entity must produce, sell, distribute or import, however it states that these terms should be understood as excluding very minor dealings.</p> <p>The Guidance states that “control” is to be interpreted broadly and is not limited to the understanding of the term under IFRS or GAAP.</p> <h2>Form of the Report</h2> <p>The Guidance sets out detailed rules for the attestation of the report, including recommended text. It also discourages the use of joint reports unless all included entities have similar risk profiles and similar policies and recommends that reports be filed in both English and French.</p> <p>The report should be in PDF format, limited to a maximum of 100 MB and no longer than 10 pages in length (20 pages if provided in both French and English). The report is to be accompanied by a completed questionnaire and, while it is not required, the Guidance states that entities can use the exact same information and structure provided in the questionnaire to prepare their report; however, entities may include additional information and supplementary content in their report, including charts and graphs.</p> <h2>Contents of the Report</h2> <p>The Guidance recommends that entities include in their reports the names of all foreign legislation under which they have made similar reports (this information is also requested in the Questionnaire). Among other things, the Guidance:</p> <ul> <li>Reaffirms that no prescribed level of detail is required in the report, provided that detail is appropriate to the size and risk profile of the entity and that each of the content requirements of the Act is addressed.</li> <li>States that commercially sensitive information may be excluded and that no specific instances of forced and/or child labour need be referenced.</li> <li>Provides examples of the nature of information that may be included in respect of each of the component elements of the report.</li> <li>Requires that entities that control other entities describe the policies, activities, diligence, risk assessment, remediation, training and assessment undertaken in respect of such controlled entities as well.</li> <li>Welcomes the inclusion of existing action plans and information about planned future steps, but not to the point of turning the report into a mission statement.</li> <li>Recommends that straightforward language appropriate to a public-facing document be used.</li> </ul> <h2>The Questionnaire</h2> <p>The report must be accompanied by a completed <a rel="noopener noreferrer" target="_blank" href="https://www.publicsafety.gc.ca/cnt/cntrng-crm/frcd-lbr-cndn-spply-chns/sbmt-rprt-en.aspx">questionnaire</a>. Essentially, the questionnaire is an online form designed to elicit answers to specific questions that can easily be compared between entities. There is both a set of basic, mandatory questions that typically involve choosing from among a number of predetermined responses and an opportunity to expand on those responses, if the entity chooses, with freeform answers up to a 1500 character limit.</p> <h2>Going Forward</h2> <p>In light of the looming initial report filing deadline of May 31, 2024 (and potentially earlier in respect of <em>Canada Business Corporations Act</em> issuers required to provide the report along with their financial statements), entities that have not done so already should be proceeding in earnest to mobilize internal resources to the task of assessing the applicability of the Act and preparing their reports. With the benefit of the newly issued Guidance, they are now much better positioned to do so with confidence.</p>22-Dec-2023 03:37:00{A21ED76D-B2FF-452C-ACBA-F2DED20B1304}https://www.stikeman.com/en-ca/kh/canadian-securities-law/board-composition-gender-diversity-and-beyondRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalJohn R. Laffinhttps://www.stikeman.com/en-ca/people/l/john-r-laffinCanadian Securities LawBoard Composition: Gender Diversity and Beyond<p><strong>The Canadian Securities Administrators (“CSA”) have released their annual review of disclosure regarding women on boards and in executive officer positions at Toronto Stock Exchange-listed issuers, showing positive trends in the growth of women’s representation over the last nine years. Data from Innovation, Science and Economic Development Canada (“ISED Canada”) on public issuers incorporated under the <em>Canada Business Corporations Act</em> (“CBCA”) and our data on S&P/TSX 60 constituents have also shown progress with respect to the representation of women, although significant gaps remain for members of other diverse groups.</strong></p> <ul> <li>CSA data shows that, between 2015 and 2023, the percentage of board seats occupied by women has more than doubled, from 11% to 27%; however, there has been slower growth in terms of the percentage of board chairs who are women, from 5% in 2019 to 8% in 2023.</li> <li>According to CSA data, issuers with a woman chief executive officer (“CEO”) have remained stagnant at 5% from 2020 to 2023, and issuers with a woman chief financial officer (“CFO”) have decreased by 2% from last year, to 17% in 2023.</li> <li>The majority of issuers reviewed by the CSA (64%) have adopted a written policy relating to the representation of women on their board, with 43% of issuers adopting targets for the representation of women on their board and 5% adopting targets for representation in executive officer positions; however, only 34% of distributing corporations reviewed by ISED Canada had adopted a written policy with respect to the representation of women on boards.</li> </ul> <h2>The Reviews</h2> <p>On October 5, 2023, the CSA published <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-10/sn_20231005_58-316_women-on-boards.pdf"><strong>CSA Multilateral Staff Notice 58-316 <em>Review of Disclosure regarding Women on Boards and in Executive Officer Positions (Year 9 Report)</em></strong></a> (the “CSA Review”). This marked the ninth annual review by the CSA of issuers that were subject to the disclosure requirements of <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2020-10/rule_20161231_58-101_unofficial-consolidation.pdf"><strong>National Instrument 58-101 <em>Disclosure of Corporate Governance Practices</em></strong></a> (“NI 58-101”) and <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2020-10/rule_20131231_58-101f1_unofficial-consolidation.pdf"><strong>Form 58-101F1 <em>Corporate Governance Disclosure</em></strong></a> (“Form 58-101F1”). (For more information about NI 58-101, please see our <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/~/media/Files/General/Communications/IBA_Handout_Women_on_Boards">previous discussion</a> of this topic.) The results summarized disclosures from 602 issuers listed on the Toronto Stock Exchange (“TSX”) that had year-ends between December 31, 2022, and March 31, 2023, and filed information circulars or annual information forms by July 31, 2023.</p> <p>ISED Canada has also released its <a rel="noopener noreferrer" target="_blank" href="https://ised-isde.canada.ca/site/corporations-canada/en/data-services/diversity-boards-directors-and-senior-management-federal-distributing-corporations-2022-annual?utm_campaign=cc_diversity_report_2022&utm_medium=link&utm_source=notice&utm_content=eng">third annual report</a> (the “CBCA Review”), which looked at the diversity disclosures of 498 issuers. The CBCA <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/Increased-Diversity-Disclosure-for-CBCA-Corporations-Coming-in-2020">diversity disclosure requirements</a> apply to all “distributing corporations” incorporated under the CBCA, which include those listed on the TSX as well as those listed on other stock exchanges, such as the TSX Venture Exchange, the Canadian Stock Exchange or other foreign stock exchanges, and address more facets of diversity, including women, visible minorities, Indigenous persons and persons with disabilities.</p> <p>Since 2016, Stikeman Elliott has also been tracking various corporate governance topics, including gender diversity on boards and in executive officer positions at S&P/TSX 60 constituents.</p> <h2>Progress Made</h2> <p>In terms of total board seats held by women, the CSA Review shows a positive trend, from 11% in 2015 to 27% in 2023, an overall 145%<strong> </strong>increase.</p> <p><img src="/-/media/images/kh-media/blog-images/2023-01---board-seats-held-by-women.ashx?la=en-ca&hash=56FF32C0173E04EC7723142EF8A90965" style="height:183px; width:420px;" alt="2023 01 - Board Seats Held by Women" /></p> <p>However, in terms of representation of women in senior management positions, the growth rate has been much slower over the past five years.</p> <ul> <li>71% of issuers have at least one woman in an executive officer position, an increase of approximately 8% from 2018.</li> <li>Only 5% of issuers had a woman CEO, as compared to 4% in 2018. Since 2020, this figure has been stagnant at 5% each year.</li> <li>17% of issuers had a woman CFO. Although this is an overall 21% change since 2018, this figure was at 19% last year.</li> </ul> <p><img src="/-/media/images/kh-media/blog-images/2023-02---senior-management-positions.ashx?la=en-ca&hash=6E27698B6DB7E3E82DA0796184FE248B" style="height:200px; width:420px;" alt="2023 02 - Senior Management Positions" /></p> <p>Our data for S&P/TSX 60 constituents comparing 2016 to 2023 shows growth in both the percentage of board seats and executive officer positions held by women. On average, S&P/TSX 60 constituents have 2.6 women board members and 2 women executive officers.</p> <ul> <li>Board seats held by women: 38%.</li> <li>Executive officer positions held by women: 29%.</li> </ul> <p><img src="/-/media/images/kh-media/blog-images/2023-03----se-data.ashx?la=en-ca&hash=31F29EEFDBA679747ED512B4476D7D5C" style="height:180px; width:420px;" alt="2023 03 - SE Data" /></p> <p>Once again, the CSA Review found a positive correlation between issuers adopting certain diversity measures and the proportion of board seats held by women. Where issuers had adopted targets for the representation of women on their boards, there was a greater percentage of women on their boards (32%) as compared to issuers without board targets (22%). Another diversity measure that showed a similar correlation was the adoption of written board policies. Issuers with written board policies had a greater proportion of women on their boards (30%) than issuers without written board policies (19%).</p> <p><img src="/-/media/images/kh-media/blog-images/2023-04---board-targets-policies.ashx?la=en-ca&hash=E967584E4C4DB4E33101C1F8A487D3DB" style="height:258px; width:420px;" alt="2023 04 - Board Targets Policies" /></p> <p>The CSA Review also shows that 23% of the issuers that were reviewed had adopted director term limits. From this group of issuers, 33% adopted age limits alone, 31% adopted tenure limits alone and 36% adopted both age and tenure limits. Our tracking shows that 42% of S&P/TSX 60 constituents had director term limits which were, on average, 13 years long, and that age limits on retirement from director positions were adopted by 43% of issuers, at an average age limit of 73 years.</p> <h2>Looking Beyond Gender Diversity</h2> <p>We also track progress in other facets of diversity beyond gender, including the representation of visible minorities, Indigenous persons and persons with disabilities on boards. In 2023, on average, the boards of the S&P/TSX 60 constituents were composed of 1% Indigenous persons, 10% visible minorities and 0.72% persons with disabilities. The CBCA Review also looks at these facets of diversity, and its sample issuers’ boards were made up of 0.6% Indigenous persons, 6% visible minorities and 0.4% persons with disabilities. The CSA are currently <a rel="noopener noreferrer" target="_blank" href="https://can01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.securities-administrators.ca%2Fnews%2Fcanadian-securities-regulators-propose-changes-to-corporate-governance-disclosure-practices-and-guidelines%2F&data=05%7C01%7CZAliasgari%40stikeman.com%7Cd111b5b716ae41f1ca8b08dbeadb1343%7C394646dfa1184f83a4f46a20e463e3a8%7C0%7C0%7C638361998852394713%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=NhZCYO%2BxcHWDSmLk1IXvy1wygT83L5CwUsm6nOIxuGU%3D&reserved=0">proposing amendments</a> to corporate governance disclosure rules, which include changes to board and executive diversity disclosures. One of the proposed options would require an issuer to disclose its approach to diversity in respect of the board and executive officers but would not mandate disclosure in respect of any specific groups other than women. A second, more prescriptive approach that is being proposed would require reporting on the representation of five designated groups, being women, Indigenous peoples, racialized persons, persons with disabilities and LGBTQ2SI+ persons, on boards and in executive officer positions.</p> <p>For more information, please see <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-04/csa_20230413_58-101_58-201_corporate-governance-rfc.pdf">CSA Notice and Request for Comment: Proposed Amendments to Form 58-101F1 <em>Corporate Governance Disclosure</em> of National Instrument 58-101 <em>Disclosure of Corporate Governance Practices</em> and Proposed Changes to National Policy 58-201 <em>Corporate Governance Guidelines</em></a>, which describes the proposed amendments. For some of our previous discussion of board and executive diversity, please see:</p> <ul> <li><a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/more-women-are-sitting-on-canadian-boards-but-where-are-the-women-ceos-and-chairs">More Women Are Sitting on Canadian Boards But Where Are the Women CEOs and Chairs?</a> (December 7, 2021);</li> <li><a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/are-more-women-in-canadian-boardrooms">Are More Women in Canadian Boardrooms? Sixth Annual CSA Review Now Supplemented by First Ever Reporting Under CBCA Amendments</a> (April 20, 2021); and</li> <li><a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/iss-governance-announces-proposed-benchmark-policy-changes-for-2024">ISS Governance Announces Proposed Benchmark Policy Changes for 2024</a> (November 23, 2023).</li> </ul> <p><em><span>The authors would like to acknowledge the support and assistance of Zoey Aliasgari, articling student at law.</span></em></p>21-Dec-2023 07:17:00{CA5A916C-F435-4B69-B78A-C1847871F974}https://www.stikeman.com/en-ca/kh/canadian-securities-law/the-oscs-statement-of-priorities-for-2024-2025-regulating-through-economic-and-technological-changeStikeman ElliottCanadian Securities LawThe OSC’s Statement of Priorities for 2024-2025: Regulating through Economic and Technological Change<p><strong>The Ontario Securities Commission (“OSC”) recently published its proposed Statement of Priorities for 2024-2025 (the “Statement”), outlining the initiatives on which the OSC intends to focus its resources and actions over the next fiscal year.</strong></p> <p>The Statement supports the OSC’s commitment to be effective and accountable in delivering on its mandate to: protect investors from unfair, improper or fraudulent practices; foster fair, efficient and competitive capital markets and confidence in the capital markets; foster capital formation; and contribute to the stability of the financial system and the reduction of systemic risk.</p> <h2>Key Initiatives</h2> <p>To this end, the OSC has identified multiple priority initiatives, which include:</p> <ul> <li>publishing and implementing a new six-year OSC Strategic Plan;</li> <li>advancing work on environmental, social and governance (“ESG”) disclosures for reporting issuers; the OSC notes that an updated staff notice on <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-provide-disclosure-guidance-to-investment-funds-engaged-in-esg-investing">ESG-related investment fund disclosure</a> is expected to be published by March 2024 and the Canadian Securities Administrators continue to develop a revised <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-product-liability-law/csa-welcome-release-by-issb-of-global-sustainability-disclosure-standards">climate-related disclosure rule</a> for reporting issuers that are not investment funds;</li> <li>considering comments received in response to <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-04/csa_20230413_58-101_58-201_corporate-governance-rfc.pdf">proposed amendments to corporate governance disclosure requirements</a> published in April 2023 and whether to require disclosure on aspects of diversity beyond the representation of women;</li> <li>assessing the <a rel="noopener noreferrer" target="_blank" href="https://stikeman.com/en-ca/kh/canadian-securities-law/csa-and-ciro-publish-review-of-registrants-conflicts-of-interest-practices">implementation of the Client Focused Reforms</a> as well as the impact of registrants’ approaches to shelf formulation and decisions to rely on predominantly proprietary products;</li> <li>advancing initiatives to strengthen the <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-revisit-short-selling-in-canada">short selling framework</a>;</li> <li>considering whether to allow order-execution only firms to provide non-tailored advice to do-it-yourself investors;</li> <li>advancing cooperation and collaboration with Indigenous peoples by developing an OSC action plan for truth and reconciliation;</li> <li>enhancing information sharing with the Canadian Public Accountability Board;</li> <li>conducting initiatives for retail investors through specific education, policy, research and behavioural science activities;</li> <li>strengthening the <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/obsi-joint-regulators-committee-releases-annual-report-for-2022">dispute resolution framework of the Ombudsman for Banking Services and Investments</a> (“OBSI”) and modernizing the OSC’s disgorgement framework; actions will include developing a framework that provides an independent dispute resolution service, such as OBSI, with the authority to make binding compensation decisions and publishing a proposed rule that would govern the distribution of disgorged amounts collected by the OSC;</li> <li>strengthening oversight and enforcement in the crypto asset sector; actions will include applying regulatory obligations to crypto firms that provided a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-expand-commitments-that-are-immediately-required-from-unregistered-crypto-asset">pre-registration undertaking</a>, coordinating with the Canadian Investment Regulatory Organization to facilitate crypto firms becoming members and continuing to develop a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-publish-interim-approach-to-stablecoins">regulatory framework for value-referenced crypto assets</a>;</li> <li>modernizing delivery options for regulatory and continuous disclosure filings for issuers by developing final amendments to implement an <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-access-equals-delivery-model-for-prospectuses">access model for certain continuous disclosure documents</a> for corporate finance reporting issuers as well as a proposed <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2022-09/ni_20220927_81-106-rfc-investment-fund-reporting-issuers.pdf">access model for investment funds’ continuous disclosure filings</a>;</li> <li>facilitating financial innovation;</li> <li>furthering initiatives that promote capital formation and foster competition; actions will include monitoring the use of <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-expands-accredited-investor-exemption-to-include-self-certified-investors">Ontario Instrument 45-507 <em>Self-certified Investor Prospectus Exemption (Interim Class Order)</em></a>, considering potential rule amendments that would introduce a prospectus exemption based on relevant educational and business experience and considering taking steps to reduce the length of the hold period applicable to securities distributed under the accredited investor exemption by seasoned reporting issuers;</li> <li>executing the OSC’s Inclusion and Diversity Strategy; and</li> <li>integrating digital and data capabilities and processes to support effective decision making, risk monitoring and streamlined operations at the OSC.</li> </ul> <p>The OSC accepted stakeholder feedback on the Statement until December 18, 2023. For more information, see <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-11/20231116_11-798_statement-of-priorities-2024-2025_EN.pdf">OSC Notice 11-798 <em>Statement of Priorities: Request for Comments regarding Statement of Priorities for Fiscal Year 2024-2025</em></a> as well as the <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/en/securities-law/instruments-rules-policies/1/11-798/osc-notice-11-798-statement-priorities-request-comments-regarding-statement-priorities-fiscal-year/comment-letters">comments received</a>.</p>21-Dec-2023 04:47:00{73A4AB2E-8DA0-4EF0-81AD-F69475AD4180}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-publish-interim-approach-to-stablecoinsAlix d'Anglejan-Chatillonhttps://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillonRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalCanadian Securities LawCSA Publish Interim Approach to Stablecoins<p><strong>This fall, the Canadian Securities Administrators (“CSA”) released </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-10/csa_20231005_21-333_crypto-platforms-vrca.pdf"><strong>CSA Staff Notice 21-333 <em>Crypto Asset Trading Platforms: Terms and Conditions for Trading Value-referenced Crypto Assets with Clients</em></strong></a><strong> (the “Staff Notice”) to provide further guidance to crypto asset trading platforms (“CTPs”) on the CSA’s interim approach to value-referenced crypto assets (“VRCAs”, commonly referred to as “stablecoins”). The Staff Notice sets out terms and conditions on which the CSA would consent to a CTP continuing to make certain VRCAs available to its clients, along with important dates for implementation.</strong></p> <h2>Background</h2> <p>A VRCA is a crypto asset that is designed to maintain a stable value over time by referencing the value of a fiat currency, any other value or right or a combination thereof. As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-expand-commitments-that-are-immediately-required-from-unregistered-crypto-asset">previous post</a>, VRCAs may constitute securities and/or derivatives in some jurisdictions. Registered CTPs and CTPs that have provided a pre-registration undertaking (“PRU”) to the CSA are prohibited from allowing clients to: (i) trade crypto assets that are securities and/or derivatives; and (ii) enter into crypto contracts in respect of crypto assets that are securities and/or derivatives.</p> <p>While these prohibitions remain in force, a <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-02/csa_20230222_21-332_crypto-trading-platforms-pre-reg-undertakings.pdf">CSA Staff Notice</a> published earlier this year suggested that the CSA might provide CTPs with written consent to permit their clients to continue trading, on an interim basis, certain VRCAs that seek to replicate the value of a single fiat currency (“Fiat-backed Crypto Assets” or “FBCAs”). Such consent would be subject to potential terms and conditions, including, in all cases, that the issuer set aside an adequate reserve of assets denominated in that currency. The CSA clarify this interim approach in the most recent Staff Notice but note that it does not apply to: (i) VRCAs that are not FBCAs; and (ii) any new VRCA that a CTP may wish to offer after the publication date of the earlier CSA Staff Notice (i.e., February 22, 2023).</p> <h2>Terms and Conditions</h2> <p>Appendix A to the Staff Notice (“Appendix A”) outlines terms and conditions on which the CSA would consent to a CTP continuing to allow its clients to buy or deposit VRCAs or to enter into crypto contracts to buy or deposit VRCAs. They require the:</p> <ul> <li><strong>CTP to establish that certain conditions are met</strong>; specifically: (i) the VRCA references, on a one-for-one basis, the value of a single fiat currency (the “reference fiat currency”); (ii) the reference fiat currency is the Canadian or United States dollar; (iii) the VRCA entitles a holder who maintains an account with the issuer to a right of redemption, as prescribed; and (iv) the issuer maintains a reserve of assets, as prescribed;</li> <li><strong>Issuer to make certain information publicly available</strong>; specifically: (i) details of each type, class or series of the VRCA, including the date on which the VRCA was launched and its key features and risks; (ii) the quantity of all outstanding units of the VRCA and their aggregate nominal value at least once each business day; (iii) the names and experience of the persons or companies involved in the issuance and management of the VRCA; (iv) the quantity of units of the VRCA held by the issuer or any of the foregoing persons or companies and their nominal value at least once each business day; (v) details of how a holder may redeem the VRCA, including any possible restrictions on redemptions; (vi) details of a holder’s rights against the issuer and the reserve of assets, including in the event of insolvency or winding up; (vii) all fees charged by the issuer for distributing, trading or redeeming the VRCA; (viii) whether holders are entitled to any revenues generated by the reserve of assets; (ix) details of any instances when the issuer suspended or halted redemptions for all holders or was unable to satisfy redemption rights at the price or in the time specified in its public policies; (x) an assurance report from a public accountant, as prescribed; and (xi) annual financial statements, as prescribed;</li> <li><strong>Crypto asset statement to include certain information</strong>; specifically: (i) certain prescribed prominent statements that relate to risks associated with VRCAs; (ii) a description of the VRCA and its issuer; (iii) a description of the due diligence performed by the CTP with respect to the VRCA; (iv) a brief description of the information that the issuer must make publicly available, with links to that information; (v) a link to the location on the issuer’s website where any event that has or is likely to have a significant effect on the value of the VRCA or the reserve of assets will be disclosed; (vi) a description of the circumstances in which the secondary market trading value of the VRCA may deviate from par with the reference fiat currency and details of any such material instances during the last 12 months on the CTP’s platform; (vii) descriptions of risks related to the VRCA, as prescribed; (viii) certain additional statements, as prescribed, depending on whether the CTP is registered or provided a PRU; and (ix) the date on which this information was last updated;</li> <li><strong>CTP to include or reference a statement regarding its use of the term “stablecoin” or “stablecoins”</strong> in any information, communication, advertising or social media related to its platform that is targeted at or accessible by Canadian investors, as prescribed, if applicable;</li> <li><strong>Issuer to file an undertaking acceptable to the CSA</strong>, in substantially the same form as Appendix B to the Staff Notice, and which includes a submission to jurisdiction and the appointment of an agent for service in the form of Appendix C to the Staff Notice;</li> <li><strong>CTP to have policies and procedures</strong> that require the CTP to assess whether the VRCA or its issuer satisfies certain criteria on an ongoing basis and, if the VRCA no longer satisfies such criteria, facilitate halting or suspending deposits or purchases of the VRCA or crypto contracts in respect of the VRCA as quickly as is commercially reasonable; and</li> <li><strong>VRCA to be offered as described in the exemptive relief decision or PRU of the CTP</strong>.</li> </ul> <p>The CSA also caution that a VRCA’s satisfaction of the terms and conditions in the Staff Notice should not be viewed as an indication of regulatory endorsement or approval, that the VRCA is risk-free or that all risks are adequately mitigated or that the VRCA or its issuer are in compliance with Canadian securities legislation.</p> <h2>Implementation</h2> <h3>CTPs</h3> <p>If a CTP that is registered or that has provided a PRU does not intend to continue to allow its clients to buy or deposit VRCAs or to enter into crypto contracts to buy or deposit VRCAs, the CSA expect the CTP to no longer allow clients to do so by December 29, 2023.</p> <p>Alternatively, if the CTP intends to continue to make VRCAs available to its clients, the CSA expect the CTP to:</p> <ul> <li>as soon as possible, contact its principal regulator to discuss next steps;</li> <li>by December 29, 2023, no longer allow clients to buy or deposit VRCAs or to enter into crypto contracts to buy or deposit VRCAs that are not FBCAs that satisfy certain conditions in Appendix A; and</li> <li>by April 30, 2024, no longer allow clients to buy or deposit FBCAs or to enter into crypto contracts to buy or deposit FBCAs that do not comply with the terms and conditions in Appendix A.</li> </ul> <h3>Issuers</h3> <p>Issuers are expected to have filed an undertaking acceptable to the CSA by December 1, 2023, and to contact the CSA as soon as possible to discuss next steps. While this deadline does not preclude an issuer from filing an undertaking on a later date, a delayed filing may prevent a CTP from continuing to make the VRCA of such issuer available to its clients.</p> <h2>What’s Next?</h2> <p>The CSA continue to monitor and assess the presence and role of VRCAs in Canadian capital markets as well as international regulatory developments. The Staff Notice presents an interim approach, and the CSA remain receptive to comments and alternative proposals, provided that investor protection is addressed.</p> <p>The Staff Notice also contemplates potential future approaches to VRCAs. These include long-term regulation, the referencing of other fiat currencies and the offering of VRCAs that are not FBCAs. To this end, the CSA welcome submissions from stakeholders, which will be considered as any regulatory changes and policy statements are developed.</p>19-Dec-2023 03:41:00{3D36426F-2ECD-47F8-B708-89AAA33DA390}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-proposes-fee-increase-for-restricted-dealers,-including-crypto-asset-trading-platformsStikeman ElliottCanadian Securities LawOSC Proposes Fee Increase for Restricted Dealers, Including Crypto Asset Trading Platforms<p><strong>The Ontario Securities Commission (“OSC”) recently </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-11/rule_20231109_13-502_rfc-proposed-amendments_0.pdf"><strong>proposed amendments</strong></a><strong> (the “Proposed Amendments”) to OSC Rule 13-502 <em>Fees</em> and OSC Rule 13-503 <em>(Commodity Futures Act Fees)</em> (together, the “Fee Rules”) that would introduce two additional fees for restricted dealers, which include crypto asset trading platforms (“CTPs”). The Proposed Amendments were published for a 90-day comment period that ends on February 7, 2024.</strong></p> <h2>Proposed Amendments</h2> <p>The review of novel businesses in emerging sectors requires significant regulatory resources to initiate compliance discussions, understand complex business models and impose detailed obligations that mitigate investor protection risk. The OSC therefore incurs significantly higher costs when onboarding restricted dealers, such as CTPs, as compared to other market participants. Although fees are typically reviewed by the OSC every three years, the Proposed Amendments were introduced outside of the regular cycle to address and recover these additional costs.</p> <h3>New additional fees</h3> <p>The average registration fee paid by a CTP has historically been approximately C$2,600; however, the OSC estimates that, unlike typical firms, CTPs cost an additional C$24,500 to register. The OSC has accordingly proposed an additional registration fee of C$24,500 for restricted dealers, to better align regulatory fees with costs.</p> <p>Apart from becoming registered as a restricted dealer, a CTP that performs marketplace functions also needs to obtain an exemption from operating as a recognized alternative trading system. The OSC estimates that it spends an additional C$24,500 on applications for such exemptive relief, as compared to applications for exemptive relief that are more typical. The Proposed Amendments therefore include an exemptive relief application fee of C$24,500 for restricted dealers that perform marketplace functions, in addition to existing fees that range from C$4,800 to C$7,000.</p> <p>For ease of reference, the proposed onboarding fees for restricted dealers are summarized in the table below.</p> <table> <tbody> <tr> <td style="width: 34%;"> <p><strong>One-time Fees</strong></p> </td> <td style="width: 33%;"> <p><strong>Restricted Dealer</strong></p> </td> <td style="width: 33%;"> <p><strong>Restricted Dealer that also Performs Marketplace Functions</strong></p> </td> </tr> <tr> <td style="width: 34%;"> <p>Registration fee (on average)</p> </td> <td style="width: 33%;"> <p>C$2,600</p> </td> <td style="width: 33%;"> <p>C$2,600</p> </td> </tr> <tr> <td style="width: 34%;"> <p>Exemptive relief application fee (on average)</p> </td> <td style="width: 33%;"> <p>C$7,000</p> </td> <td style="width: 33%;"> <p>C$7,000</p> </td> </tr> <tr> <td style="width: 34%;"> <p>New additional registration fee for restricted dealers</p> </td> <td style="width: 33%;"> <p>C$24,500</p> </td> <td style="width: 33%;"> <p>C$24,500</p> </td> </tr> <tr> <td style="width: 34%;"> <p>New additional exemptive relief application fee for restricted dealers that also perform marketplace functions</p> </td> <td style="width: 33%;"> <p>-</p> </td> <td style="width: 33%;"> <p>C$24,500</p> </td> </tr> <tr> <td style="width: 34%;"> <p><strong>Total</strong></p> </td> <td style="width: 33%;"> <p><strong>C$34,100</strong></p> </td> <td style="width: 33%;"> <p><strong>C$58,600</strong></p> </td> </tr> </tbody> </table> <h3>Modified definition of “registrant firm”</h3> <p>The Proposed Amendments would also modify the definition of “registrant firm” in the Fee Rules to extend the application of the participation and late fee requirements to unregistered firms that are required to be registered. This will better align the definition of “registrant firm” with the definition of “registrant” in the <em>Securities Act</em> (Ontario) (“OSA”) and the <em>Commodity Futures Act</em> (Ontario) (“CFA”), which includes “a person or company registered <em>or required to be registered.</em>” The change will capture unregistered firms that participate in Ontario’s capital markets in non-compliance with the relevant dealer, adviser and investment fund manager requirements in either the OSA or the CFA and require them to pay the participation fees applicable to other registered firms.</p> <p>If approved, the Proposed Amendments are expected to come into force on July 2, 2024.</p>12-Dec-2023 09:43:00{FD0CE886-3F58-4541-AD35-87F731B2B208}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-amendments-to-facilitate-voluntary-t1-settlement-for-mutual-fundsStikeman ElliottCanadian Securities LawCSA Propose Amendments to Facilitate Voluntary T+1 Settlement for Mutual Funds<p><strong>The Canadian Securities Administrators (“CSA”) have </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-10/csa_20231019_81-102_rfc.pdf"><strong>proposed amendments to National Instrument 81-102 <em>Investment Funds</em></strong></a><strong> (“NI 81-102”) to facilitate voluntary decisions by mutual funds to shorten the settlement cycle for purchases and redemptions of their securities from two days after the date of a trade (“T+2”) to one day after the date of a trade (“T+1”) (the “Proposed Amendments”). The Proposed Amendments anticipate the broader adoption of T+1 settlement in Canada and have been published for a 90-day comment period, which ends on January 17, 2024.</strong></p> <h2>Background</h2> <p>As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-to-eliminate-exception-reporting-requirement-and-extend-moratorium">previous post</a>, in December 2022, the CSA published for comment proposed amendments to National Instrument 24-101 <em>Institutional Trade Matching and Settlement</em>, which would in part enable the shortening of the standard settlement cycle for equity and long-term debt market trades in Canada from T+2 to T+1. They also published <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2022-12/csa_20221215_81-335_investment-fund-settlement-cycles.pdf">CSA Staff Notice 81-335 <em>Investment Fund Settlement Cycles</em></a> (the “Staff Notice”) to clarify that while amendments to NI 81-102 were not being proposed at that time, mutual funds should voluntarily settle on T+1 if the standard settlement cycle in Canada became T+1.</p> <h2>Proposed Amendments</h2> <p>The CSA received one comment letter regarding the Staff Notice, in which the commenter observed that a technical amendment should be made to the forced redemption for non-payment requirement in paragraph 9.4(4)(a) of NI 81-102. While paragraph 9.4(4)(a) requires a mutual fund to redeem securities that were issued to a purchaser if the purchaser fails to pay for those securities the day after settlement, the provision is premised on the current settlement cycle of T+2. Without the Proposed Amendments, a mutual fund that shortens its settlement cycle to T+1 would be unable to redeem its securities for non-payment for an additional day (i.e., until two days after settlement, as opposed to one). In the CSA’s view, this may prove administratively challenging and disincentivize mutual funds that are considering a transition to T+1 settlement.</p> <p>The Proposed Amendments therefore consist of technical changes to accommodate mutual funds that voluntarily decide to settle on T+1. They provide that payment must be made no later than the “reference settlement date” of the purchase order for a mutual fund’s securities. The “reference settlement date” means the earlier of: (i) the business day determined by the mutual fund and disclosed in writing to the principal distributor, participating dealer or person or company providing services to the principal distributor or participating dealer; and (ii) the second business day after the pricing date. The Proposed Amendments also modify paragraph 9.4(4)(a) of NI 81-102 to require a mutual fund that shortens its settlement cycle to T+1 to redeem its securities for non-payment on the next business day after the reference settlement date of the purchase order (i.e., on T+2).</p> <p>Stakeholders are invited to comment on the Proposed Amendments. According to a <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-08/csa_20230810_24-319_update-staff-recommendation.pdf">CSA Staff Notice published in August 2023</a>, Canada is still expected to adopt a standard settlement cycle of T+1 on May 27, 2024.</p>30-Nov-2023 08:46:00{B3EDB3E7-2D02-4909-A7EC-33496D619F21}https://www.stikeman.com/en-ca/kh/canadian-securities-law/iss-governance-announces-proposed-benchmark-policy-changes-for-2024Stikeman ElliottCanadian Securities LawISS Governance Announces Proposed Benchmark Policy Changes for 2024<p><strong>On November 21, 2023, Institutional Shareholder Services (“ISS”) Governance announced </strong><a rel="noopener noreferrer" target="_blank" href="https://www.issgovernance.com/file/policy/2023/Benchmark-Policy-Changes-For-Comment-2024.pdf"><strong>proposed changes to its benchmark voting policy for 2024</strong></a><strong> (the “Proposed Changes”). To ensure that a broad range of perspectives is considered, ISS is soliciting stakeholder feedback until November 30, 2023.</strong></p> <h2>The Proposed Changes</h2> <p>ISS indicates that fewer changes are proposed for the 2024 proxy season than have been proposed in the last few years. Of the four Proposed Changes, only one applies to Canada.</p> <p>As we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/2023-canadian-policy-updates-from-iss-and-glass-lewis-focus-on-diversity-and-climate-risk">previous post</a>, in 2022, a new board diversity policy was approved for Canadian S&P/TSX Composite Index constituents, applicable to shareholder meetings on or after February 1, 2024. As part of the Proposed Changes, ISS intends to remove the transition language that provided a one-year grace period and to reframe the language that provided an exception where a company makes a public commitment to appoint at least one racially and/or ethnically diverse member at or prior to the next annual general meeting (“AGM”).</p> <p>The current and proposed new ISS policies are as follows:</p> <table style="width: 100%;"> <tbody> <tr> <td><strong> Current ISS Policy</strong></td> <td><strong> Proposed New ISS Policy</strong><br /> </td> </tr> <tr> <td> General Recommendation: For meetings on or after February 1, 2024, for companies in the S&P/TSX Composite Index, generally vote against or withhold from the chair of the nominating committee or chair of the committee designated with the responsibility of a nominating committee, or the chair of the board of directors if no nominating committee has been identified or no chair of such committee has been identified, where the board has no apparent racially or ethnically diverse members*. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm public commitment to appoint at least one racial and/or ethnic diverse member at or prior to the next AGM.<br /> <br /> Evaluate on a case-by-case basis whether against/withhold recommendations are warranted for additional directors at companies that fail to meet the policy over two years or more.<br /> <div> </div> </td> <td>General Recommendation: For companies in the S&P/TSX Composite Index, generally vote against or withhold from the chair of the nominating committee or chair of the committee designated with the responsibility of a nominating committee, or the chair of the board of directors if no nominating committee has been identified or no chair of such committee has been identified, where:<br /> <ul> <li>the board has no apparent racially or ethnically diverse members*; and</li> <li>the company has not provided a formal, publicly-disclosed written commitment to add at least one racially or ethnically diverse director at or prior to the next AGM.</li> </ul> Evaluate on a case-by-case basis whether against/withhold recommendations are warranted for additional directors at companies that fail to meet the policy over two years or more.<br /> <div> </div> <br /> <div> </div> </td> </tr> </tbody> </table> <p>*Racial and/or ethnic diversity is defined by the Government of Canada as: Aboriginal peoples (meaning persons who are Indigenous, Inuit or Métis) and members of visible minorities (meaning persons, other than Aboriginal peoples, who are non-Caucasian in race or non-white in colour).</p> <p>The implementation of this benchmark policy, effective February 1, 2024, will align the ISS Canadian S&P/TSX Composite Index policy more closely with the ISS U.S. policy for Russell 3000 and/or S&P 1500 indices on racial/ethnic diversity.</p> <p>ISS expects to release the final benchmark policy changes in or around mid-December 2023.</p>23-Nov-2023 07:10:00{6B46531C-624C-44CE-892B-A993EADC9A1A}https://www.stikeman.com/en-ca/kh/canadian-securities-law/bcsc-launches-whistleblower-program-with-financial-awardsStikeman ElliottCanadian Securities LawBCSC Launches Whistleblower Program with Financial Awards<p><strong>On November 7, 2023, the British Columbia Securities Commission (“BCSC”) launched a </strong><a rel="noopener noreferrer" target="_blank" href="https://www.bcsc.bc.ca/about/media-room/news-releases/2023/90-bcsc-offering-money-for-qualified-tips-through-new-whistleblower-program"><strong>whistleblower program</strong></a><strong> designed to provide financial awards for qualified tips about investment fraud and other serious types of market misconduct. As such, the BCSC became the second securities regulatory authority in Canada to implement a whistleblower program that offers financial incentives in exchange for helpful information.</strong></p> <h2>Whistleblower Program</h2> <p><a rel="noopener noreferrer" target="_blank" href="https://www.bcsc.bc.ca/-/media/PWS/New-Resources/Securities-Law/Instruments-and-Policies/Policy-1/15604-BCP-November-7-2023.PDF?dt=20231102172820">BC Policy 15-604 <em>Whistleblower Program</em></a> provides that an individual is eligible to receive a financial award if they disclose information that meaningfully contributes to an important enforcement result. Among other things, this may include the:</p> <ul> <li>issuance of a halt trade, temporary or preservation order;</li> <li>issuance of an administrative penalty;</li> <li>issuance of a notice of hearing;</li> <li>entering into of a settlement agreement;</li> <li>identification and location of assets of a person who has been ordered to pay monetary sanctions; or</li> <li>collection of outstanding amounts due from orders, settlement agreements or administrative penalties.</li> </ul> <p>Individuals who provide information about only their own wrongdoing are excluded from receiving an award, as are individuals who:</p> <ul> <li>work for the BCSC, any other securities regulator or a law enforcement agency;</li> <li>have previously been contacted by the BCSC regarding the same matter; or</li> <li>provide information that is false or misleading, was acquired illegally, is subject to solicitor-client privilege that has not been waived or was disclosed in breach of rules of professional conduct.</li> </ul> <p>Whistleblower awards may range from C$1,000 to C$250,000 and will be determined by the Executive Director of the BCSC. Consideration will be given to:</p> <ul> <li>how quickly the matter was reported;</li> <li>how clear, accurate, organized and complete the information is;</li> <li>how much the individual cooperates after providing the information;</li> <li>how much the information contributes to an important result;</li> <li>the seriousness of the misconduct reported;</li> <li>any hardship experienced by the individual as a result of exposing the wrongdoing; and</li> <li>how involved the individual was in the misconduct reported.</li> </ul> <p>Where the information meaningfully contributes to several different enforcement results, the total maximum award will be capped at C$500,000. The Executive Director may, however, exercise discretion to increase an award, including beyond the prescribed maximum, if doing so is in the public interest. Awards are not subject to review or appeal.</p> <p>Individuals who provided information prior to November 7, 2023, are not eligible to receive an award. By contrast, information received on or after November 7, 2023, but which relates to events that occurred prior to this date may be eligible for an award.</p> <p>While the securities regulators in <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/to-pay-or-not-to-pay-whistleblower-programs-launch-in-ontario-and-quebec">Ontario, Quebec</a> and <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/Alberta-Launches-Whistleblower-Program">Alberta</a> have whistleblower programs in place as well, neither the Autorité des marchés financiers nor the Alberta Securities Commission offers financial incentives.</p> <h2>Cooperation Credits</h2> <p>The BCSC also released <a rel="noopener noreferrer" target="_blank" href="https://www.bcsc.bc.ca/-/media/PWS/New-Resources/Securities-Law/Instruments-and-Policies/Policy-1/15701-BCN-November-7-2023.PDF?dt=20231102172821">BC Notice 15-701 <em>Credit for Cooperation in Enforcement Matters</em></a>, which explains the benefits of self-reporting and the factors that the BCSC will consider when determining whether cooperation merits credit in enforcement matters. While individuals who provide information exclusively about their own wrongdoing are ineligible for a whistleblower award, cooperation may result in the BCSC recommending, among other things, that enforcement proceedings not be commenced, less serious allegations be pursued or reduced sanctions be sought.</p>21-Nov-2023 03:28:00{8CC77A33-400A-42C1-BFB4-2BDBCDAA7616}https://www.stikeman.com/en-ca/kh/canadian-securities-law/obsi-joint-regulators-committee-releases-annual-report-for-2022Stikeman ElliottCanadian Securities LawOBSI Joint Regulators Committee Releases Annual Report for 2022<p><strong>The Canadian Securities Administrators (“CSA”) and the Canadian Investment Regulatory Organization (“CIRO”) recently published the Annual Report (“Report”) of the Joint Regulators Committee (“JRC”) of the Ombudsman for Banking Services and Investments (“OBSI”), which highlights the primary activities that the JRC conducted in 2022.</strong></p> <h2>Background</h2> <p>National Instrument 31-103 <em>Registration Requirements, Exemptions and Ongoing Registrant Obligations</em> requires all registered dealers and advisers to make OBSI available to their clients as their dispute resolution service, except in Québec where dispute resolution services are administered by the Autorité des marchés financiers. The CSA and OBSI have signed a <a rel="noopener noreferrer" target="_blank" href="https://www.obsi.ca/en/about-us/resources/Documents/mou_20151202_AODA.pdf">memorandum of understanding</a> (“MOU”), which provides an oversight framework intended to ensure that OBSI meets the standards set by the CSA. The JRC consists of representatives from the CSA and CIRO whose mandate is to:</p> <ul> <li>facilitate a holistic approach to information sharing and monitor the dispute resolution process with an overall view to promoting investor protection and confidence in the external dispute resolution system;</li> <li>support fairness, accessibility and effectiveness of the dispute resolution process; and</li> <li>facilitate regular communication and consultation among JRC members and OBSI.</li> </ul> <h2>Report Highlights</h2> <p>The JRC’s activities in 2022 included the consideration and advancement of the following matters:</p> <ul> <li><strong>Independent evaluation of OBSI’s investments mandate:</strong> the MOU requires an independent evaluation of OBSI’s operations and practices on the investment side of its mandate every five years, and OBSI delivered the 2021 report (the “2021 Investments Report”) to the JRC in 2022. The 2021 Investments Report concluded that OBSI had met and exceeded its obligations under the MOU. It also provided 22 recommendations for improvement, including that OBSI be granted authority to make binding awards. The JRC met with the independent evaluators and OBSI’s Board of Directors and continues to collaborate with OBSI on next steps in response to the 2021 Investments Report;</li> <li><strong>CSA’s project to strengthen OBSI:</strong> the JRC was kept apprised of the CSA’s continued policy work to strengthen OBSI as an independent dispute resolution service, including the creation of a fair, efficient and accessible binding authority framework that aligns more closely with international best practices;</li> <li><strong>Monitoring of quarterly reports, compensation refusals and low settlements:</strong> the JRC continued to monitor data on investment-related complaints, including compensation refusals and settlements below OBSI’s recommendations. There were no compensation refusals in 2022; however, the JRC noted that low settlements continue to be an issue, particularly in cases where OBSI recommends a compensation amount higher than C$50,000. Since 2018, clients have received approximately C$1.6 million less than what OBSI recommended. The Report states that, on average, low settlement cases settled for 60% of OBSI’s recommended amount of compensation. The JRC supports the CSA’s work to provide OBSI with authority to make binding awards to mitigate such outcomes;</li> <li><strong>Systemic issues:</strong> the Chair of OBSI’s Board of Directors is required to inform the CSA designates of the JRC of any issues that are likely to have significant regulatory implications, including issues that may affect multiple clients of one or more firms. In 2022, one issue involving an order execution-only (“OEO”) dealer was reported but ultimately resolved and determined to have been limited to two complainants. The JRC continued to monitor a previously reported issue involving a portfolio manager that was the subject of multiple complaints related to misrepresentation of risk and disregard for investor risk tolerance and which became subject to registration conditions in 2022;</li> <li><strong>Complaint trends:</strong> the JRC worked with OBSI to identify and monitor emerging and ongoing trends in complaint volumes, in addition to the nature of complaints received. In 2022, the JRC observed an increase in complaints against restricted dealers pertaining to crypto assets, the majority of which related to fraudulent activities whereby a client was coerced or tricked into granting a third party access to its account and whose crypto assets were subsequently transferred to a third-party wallet. The Report also notes an increase in complaints regarding mutual funds and suitability that appear predominantly related to recent market conditions. Complaints against OEO dealers related to margin, transaction errors and trading platform service issues decreased significantly;</li> <li><strong>Review and consideration of stakeholder feedback:</strong> the JRC reviewed and discussed stakeholder feedback and continues to consider opportunities to enhance the effectiveness of its oversight and implement changes where appropriate;</li> <li><strong>Communication regarding complaint escalation processes:</strong> the JRC was apprised of firm websites that described complaint escalation processes in an unclear or confusing manner. All firms that were contacted revised their websites and other investor-facing materials accordingly;</li> <li><strong>Proposed amendments to Investment Dealer and Partially Consolidated Rules: </strong>the JRC was updated on proposed amendments that would codify regulatory expectations on reporting to CIRO and certain complaint-handling best practices;</li> <li><strong>CIRO arbitration program: </strong>the JRC reviewed recommendations of an external working group and provided feedback, noting the complexity of the complaint-handling landscape, potential for investor confusion and impact on consumer decision-making given the overlap between claims that might be pursued through either OBSI or CIRO arbitration. The JRC continues to receive updates following the publication of recommendations for CIRO’s arbitration program in December 2022; and</li> <li><strong>Federal developments relating to external complaint handling in banking:</strong> in June 2022, a new financial consumer protection framework was implemented into the <em>Bank Act</em> to strengthen complaint-handling procedures for banking consumers. The amendments have resulted in record-high banking and investment case volumes for OBSI, and the JRC continues to monitor ongoing related developments.</li> </ul> <p>For more information, please refer to <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-10/csa_20231012_31-364_obsi-joint-regulators-committee-annual-report-2022.pdf">CSA Staff Notice 31-364 <em>OBSI Joint Regulators Committee Annual Report for 2022</em></a>.</p>21-Nov-2023 03:14:00{B04BFAD2-B60B-4AB1-B485-070915CAAFC3}https://www.stikeman.com/en-ca/kh/canadian-securities-law/selective-disclosure-in-the-necessary-course-of-business-new-guidanceStikeman ElliottCanadian Securities LawSelective Disclosure in the “Necessary Course of Business”: New Guidance from Ontario’s Capital Markets Tribunal<p><strong>In </strong><a rel="noopener noreferrer" target="_blank" href="https://www.capitalmarketstribunal.ca/sites/default/files/2023-10/rad_20231020_kraft.pdf"><strong><em>Kraft (Re)</em>, 2023 ONCMT 36</strong></a><strong> (“<em>Kraft</em>”), a recent decision of Ontario’s Capital Markets Tribunal (the “Tribunal”), the panel considered the meaning of the “necessary course of business” (“NCOB”) exception to the general prohibition against the selective disclosure of material non-public information (“MNPI”). As such, <em>Kraft</em> provides significant and long-awaited guidance on the circumstances in which disclosure may be made under this tipping exception.</strong></p> <h2>Prohibition against Tipping</h2> <p>Subsection 76(2) of the <em>Securities Act </em>(Ontario) (the “Act”) provides that no issuer and no person or company in a special relationship with an issuer shall inform, <em>other than in the necessary course of business</em>, another person or company of a material fact or material change with respect to the issuer before the material fact or material change has been generally disclosed.</p> <p>The Act does not define “NCOB”, and the only source of interpretive guidance has been National Policy 51-201 <em>Disclosure Standards</em> (“NP 51-201”), which was first published in 2002. NP 51-201 suggests that the NCOB exception exists to ensure that a company's ordinary business activities are not unduly interfered with. It also lists the types of recipients to whom communications might be viewed as having been made in the NCOB.</p> <h2>Insights from <em>Kraft</em></h2> <h3>Background</h3> <p>WeedMD Inc., now named Entourage Health Corp. (“WeedMD”), is a reporting issuer on the TSX Venture Exchange that produces and distributes cannabis and cannabis extracts. In 2017, it sought to expand its business in connection with the Canadian government’s proposal to legalize the recreational use of cannabis products. WeedMD’s plans included a lease to rent space in Perfect Pick Farms Ltd.’s (“Perfect Pick’s”) greenhouse and an option to purchase Perfect Pick’s property, greenhouse and infrastructure (collectively, the “Perfect Pick Transaction”). WeedMD believed that the Perfect Pick Transaction would increase its annual production of cannabis from 1,200 kg to more than 21,000 kg, initially, and to more than 50,000 kg, following its exercise of the option.</p> <p>On October 23, 2017, the Chairman and a director of WeedMD at the time (“MK”) provided a long-time friend and business associate (“MS”) with draft documents relating to the Perfect Pick Transaction. While MS provided comments on the draft lease, he was neither formally retained nor compensated to review the documents. MK claimed that he had sought MS’s advice on the draft lease as MS was his “go-to advisor” for real estate and financial matters.</p> <p>On November 21, 2017, the day before the Perfect Pick Transaction was announced, MS purchased 45,000 shares of WeedMD for C$68,525. MS proceeded to sell his shares over the following two days for C$97,870, representing a return of approximately 43% on his investment.</p> <p>While there were several issues for determination, a submission central to MK’s argument before the Tribunal was that his selective disclosure to MS had been made in the NCOB. Applying the principles discussed below, the Tribunal found that MK had provided MS with MNPI in breach of the prohibition against tipping and that MS had traded shares of WeedMD while in possession of MNPI in breach of the prohibition against insider trading.</p> <h3>Key findings</h3> <p>The Tribunal emphasized that a primary purpose of the prohibition against tipping is to ensure that everyone in the market has equal access to and opportunity to act upon material information. In the Tribunal’s view, the NCOB exception to the prohibition must be interpreted and applied reasonably narrowly such that the purposes of the Act and rationale for the prohibition are not undermined. To this end, <em>Kraft </em>offers the following guidance:</p> <ul> <li><strong>Focus on “necessary”:</strong> the inclusion of the word “necessary” in the language of the exception elevates the requirement beyond a mere business purpose or rationale and imports a level of importance, including that something is “essential”, “indispensable” or “requisite.” The Tribunal observed that the purpose of the selective disclosure must be sufficiently important or necessary to the business to warrant an exception to the blanket prohibition against selective disclosure;</li> <li><strong>Meaning of “business”:</strong> the word “business” in the language of the exception is not qualified by the phrase “the issuer’s.” While this was not explored as a result of the facts in <em>Kraft</em>, the Tribunal indicated that the exception may not be limited to a consideration of what may be in the necessary course of the issuer’s business in all factual situations;</li> <li><strong>Objective standard:</strong> the exception is to be established on an objective basis and does not rest on any subjective belief of a tipper;</li> <li><strong>Burden of proof:</strong> the person seeking to rely on the exception bears the burden of establishing that the communication was made in the NCOB; and</li> <li><strong>Evidence of forethought:</strong> evidence of the tipping prohibition and the exception being considered prior to the selective disclosure of MNPI may prove helpful in establishing the purpose for which the disclosure was made after the fact. Such evidence may include but is not limited to: (i) discussions at the board or management level considering the advisability or need for the disclosure; (ii) documents such as retainer agreements, minutes, memoranda or other communications specifying the purpose of the disclosure; and (iii) confidentiality agreements with or confidentiality instructions provided to the intended recipient of the disclosure.</li> </ul> <p><em>Kraft</em> also clarifies that, although NP 51-201 provides helpful guidance, the NCOB exception must be established on the relevant facts. Demonstrating that selective disclosure was made to a recipient contemplated in NP 51-201 is not the end of the enquiry.</p> <p>As part of its analysis, the Tribunal acknowledged certain other non-exhaustive factors that may also be important to a consideration of whether selective disclosure satisfies the NCOB exception. These include the:</p> <ul> <li>business of the issuer;</li> <li>relationship between the tipper and the issuer;</li> <li>relationship between the tipper and the tippee;</li> <li>nature of the MNPI that was disclosed;</li> <li>relevance of the MNPI to the relationship between the tippee and the issuer;</li> <li>tipper’s reason for making selective disclosure to the tippee; and</li> <li>credibility of the tipper seeking to establish the NCOB exception.</li> </ul>16-Nov-2023 09:19:00{DF6AE95C-A2DD-4C79-8A11-01EDF75510A6}https://www.stikeman.com/en-ca/kh/tax-law/canadas-proposed-share-buyback-taxJonathan Willsonhttps://www.stikeman.com/en-ca/people/w/jonathan-willsonTax Law UpdateCanadian Securities LawCorporations & Commercial Law UpdateCanada’s Proposed Share Buyback Tax<p><strong>On November 30, 2023, <a rel="noopener noreferrer" target="_blank" href="https://www.parl.ca/legisinfo/en/bill/44-1/c-59">Bill C-59</a> (the “Bill”) received first reading in the House of Commons. The purpose of the Bill is to enact certain tax proposals from the recent fall economic statement, the 2023 federal budget and other previously announced measures. Included in Bill C-59 is a further-updated version of the proposed 2% equity buyback tax (“Buyback Tax”). Although not strictly speaking an income tax, the Buyback Tax will be included in the <em>Income Tax Act</em> (Canada) (“Tax Act”) as the new Part II.2. The Buyback Tax will apply to relevant transactions that occur on or after January 1, 2024, and does not include a safe harbour for equity issued prior to that date. Given its inclusion in Bill C-59, it is highly unlikely that the Buyback Tax will undergo any further changes prior to its enactment.</strong></p> <p><em>Note: This post replaces our original post of November 9, 2023 in order to incorporate references to the further updates that the Government of Canada have introduced in Bill C-59 to certain aspects of the Buyback Tax. These changes are listed in the section entitled “Changes Relative to August Legislation”, below.</em></p> <p>The draft legislation implementing the Buyback Tax was previously released by the Department of Finance on August 4, 2023 (“<strong>August Legislation</strong>”) which was, itself, a revised version of the initial rules introduced as part of the 2023 federal budget. The current version of the Buyback Tax rules is largely the same as the August Legislation but there are some useful refinements, the most significant of which are noted below. Despite these changes, the scope of the Buyback Tax remains broad and it will likely apply to a variety of ordinary course capital market transactions including, in particular, normal course issuer bids and substantial issuer bids. Capital markets participants will therefore need to carefully consider the Buyback Tax when evaluating transactions that involve the redemption, repurchase or cancellation of publicly traded equity.</p> <h2><span style="text-decoration: underline;">Who does the Buyback Tax apply to?</span></h2> <p>The Buyback Tax will apply to a corporation, trust or partnership that is a “covered entity,” a term which has been defined to include publicly listed Canadian resident corporations, real estate investment trusts, specified investment flow-through (“<strong>SIFT</strong>”) trusts, and SIFT partnerships. For these purposes, “equity” is defined to mean a share of a corporation, an income or capital interests in a trust or an interest as a member of a partnership.</p> <h2><span style="text-decoration: underline;">How is the Buyback Tax calculated?</span></h2> <p>In general terms, the amount of the Buyback Tax is equal to 2% of a covered entity’s net equity repurchases in the taxation year. More specifically, the Buyback Tax is computed by reference to a formula, a somewhat simplified version of which is set out below:</p> <p><img src="/-/media/files/kh-general/taxbulletin_chart.ashx?la=en-ca&hash=6C7BDC68D02AA8DC13301AA4F343BFE0" style="height:406px; width:730px;" alt="TaxBulletin_Chart" /></p> <p>Note, a “qualifying issuance” is defined for the purposes of variable C of the above formula to include the <span style="text-decoration: underline;">portion</span> of a particular issuance of equity by a covered entity that is made: (i) in exchange for cash and/or a convertible note, bond or debenture issued by the covered entity, or (ii) to an arm’s length third party in exchange for property that is used in the covered entity’s active business.</p> <p>The Buyback Tax rules contain a <em>de minimis</em> rule such that a covered entity will not be subject to the tax in any taxation year in which the <span style="text-decoration: underline;">total</span> of the amounts determined for it under variables A and B is less than C$1,000,000.</p> <h2><span style="text-decoration: underline;">Exceptions to the Buyback Tax</span></h2> <p>There are two conceptual exceptions, which, if applicable, will result in equity of a covered entity being excluded from the Buyback Tax formula. These two exceptions are summarized below.</p> <ol> <li><em><span style="text-decoration: underline;">Substantive Debt</span></em> – While this term is comprehensively defined in the Buyback Tax legislation, it is intended to capture equity that possesses debt-like characteristics (namely, limited voting, non-convertible, non-exchangeable, fixed value preferred shares).</li> <li><em><span style="text-decoration: underline;">Reorganization Transactions</span></em> – Conceptually, this exception applies to certain transactions that technically include a redemption, acquisition, or cancellation of the covered entity’s equity but that do not from a policy perspective warrant being included in variables A or B of the Buyback Tax formula. In most cases, the exception is triggered when the investor does not decrease his/her financial investment in the covered entity (or one or more successor entities). The term “reorganization transaction” is defined in detail in the Buyback Tax legislation but generally includes equity that is repurchased, redeemed, or cancelled in the course of a wind-up, an amalgamation or equity exchange whereby a holder receives consideration that includes equity, as well as so-called “butterfly transactions” covered by subsection 55(3) of the Tax Act.</li> </ol> <h2><span style="text-decoration: underline;">Anti-Avoidance Rules</span></h2> <p>The Buyback Tax provisions contain specific anti-avoidance rules which, in general terms, prevent the following transactions from reducing the amount of tax payable by a particular covered entity under the rules:</p> <ul> <li>Equity issuances or repurchases by a covered entity that are part of a transaction or series of transactions the primary purpose of which is to manipulate the Buyback Tax formula.</li> <li>Repurchases of equity issued by a covered entity by an affiliated corporation, trust, or partnership where the covered entity controls the affiliate or (ii) owns, directly or indirectly, more than 50% of the equity of the affiliate.</li> </ul> <h2><span style="text-decoration: underline;">Changes Relative to August Legislation</span></h2> <p>As noted above, while the current version of the Buyback Tax is largely unchanged from the August Legislation, the Department of Finance has fine-tuned certain aspects of the rules. The most notable changes are:</p> <ul> <li>The current version of the Buyback Tax rules deals more effectively with share exchange and amalgamation transactions in which equity holders receive both equity and non-equity consideration. This has been achieved by: (i) expanding the scope of the “reorganization transaction” definition so that it does not automatically exclude mixed consideration transactions, and (ii) adding new variable B to the Buyback Tax formula which, in general terms, only subjects to tax that portion of the equity that was redeemed, acquired or cancelled by the covered entity in exchange for non-equity consideration. In contrast, under the previous version of the Buyback Tax rules, the reorganization exception generally applied to share exchange and amalgamation transactions under which equity was the only consideration received by equity holders on the exchange.</li> <li>Similarly, the latest version of the Buyback Tax rules deals more fairly with equity issuance transactions in which the property received by the covered entity includes a non-cash component. In general terms, under the revised rules, the fair market value of any portion of an equity issuance (other than one involving substantive debt) for which the covered entity receives cash consideration will reduce the base on which the Buyback Tax is imposed. In contrast, under the August Legislation, a covered entity generally received relief under the Buyback Tax formula only when it issued equity exclusively for cash consideration.</li> <li>The definition of “covered entity” has been revised to exclude most exchange traded funds (other than SIFT trusts or real estate investment trusts) whose investments would otherwise bring them within the confines of the definition.</li> <li>The redemption by an open-ended unit trust of its equity pursuant to its terms will generally be excluded from the scope of the Buyback Tax (as a result of including such a transaction in the reorganization transaction definition) provided that the redemption occurs at the demand of a holder and the redemption proceeds do not exceed their fair market value at the time of redemption.</li> <li>The definition of “substantive debt” has been broadened to include equity with: (i) voting rights, provided that such rights do not apply to the election of the board of directors, the trustees, or the general partner (as applicable) of the covered entity, except in the event of a failure or default under the terms or conditions of the equity, and (ii) fixed dividend or distribution entitlements.</li> <li>The redemption of equity by a covered entity pursuant to the exercise by the equity holder of a statutory right of dissent (again, as a result of including such a transaction in the definition of a reorganization transaction).</li> </ul> <h2><span style="text-decoration: underline;">Observations</span></h2> <p>The Buyback Tax was likely inspired by a similar 1% tax that was implemented in the United States at the beginning of 2023, but the underlying policy rationale for the tax is less clear. According to the Department of Finance, the purpose of the Buyback Tax is “to make sure that large corporations pay their fair share [of tax], and to encourage them to reinvest their profits in workers and in Canada.” While reasonable people can differ as to whether public corporations pay enough tax, it is troubling that the federal government seems to think it is better positioned than a business to determine how its surplus capital ought to be allocated. This mindset also seems to presuppose that the funds received by investors on an equity repurchase transaction will not be reinvested in a productive manner. Perhaps the Department of Finance simply wanted to add to its assortment of revenue tools in order combat the deficit – it has been estimated that the Buyback Tax will raise on average C$500-600 million per year in revenue over its first five years of existence. While this is not an immaterial amount of money, when viewed in the context of the federal government’s total annual revenues of approximately C$457 billion (for its 2023-2024 fiscal year) it is not a significant amount either. Finally, the federal government may be of the view that equity repurchase transactions provide inappropriate tax advantages to shareholders relative to the payment of dividends. Again, what is and is not appropriate from a tax policy perspective is a subjective assessment, but it should be noted that, at least in the case of a substantial issuer bid, a significant portion of the purchase price is often characterized as a dividend for Canadian income tax purposes.</p> <h2><span style="text-decoration: underline;">Conclusion</span></h2> <p>Capital markets participants will therefore need to carefully consider the Buyback Tax when evaluating transactions that involve the redemption, repurchase or cancellation of equity by publicly traded entities.</p>09-Nov-2023 04:33:00{B27586C0-0BD2-4D76-ACCD-437EE0816556}https://www.stikeman.com/en-ca/kh/financial-services/understanding-canadas-evolving-blockchain-and-cryptocurrency-regulationsAlix d'Anglejan-Chatillonhttps://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillonRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalÉric Lévesquehttps://www.stikeman.com/en-ca/people/l/eric-levesqueFinancial Services UpdateCanadian Securities LawCanadian Technology & IP LawTax Law UpdateUnderstanding Canada’s Evolving Blockchain and Cryptocurrency Regulations<p><a href="/en-ca/people/d/alix-d-anglejan-chatillon">Alix d’Anglejan-Chatillon</a>, <a href="/en-ca/people/g/ramandeep-k-grewal">Ramandeep Grewal</a>, and <a href="/en-ca/people/l/eric-levesque">Éric Lévesque</a>, of our Toronto and Montreal offices, have recently updated <a href="/-/media/files/kh-general/stikeman-elliott---blockchain--cryptocurrency-regulation-2024.ashx">the "Canada" chapter</a> in the <em>Blockchain & Cryptocurrency Regulation 2024</em>, published by <a rel="noopener noreferrer" target="_blank" href="https://www.globallegalinsights.com/">Global Legal Insights</a>. This chapter provides an excellent overview of the rapidly developing area of law in Canada, focusing on the following topics:</p> <ul> <li>Government attitude and definition</li> <li>Cryptocurrency regulation</li> <li>Sales regulation</li> <li>Ownership and licensing requirements</li> <li>Promotion and testing</li> <li>Money transmission laws and anti-money laundering requirements</li> <li>Reporting requirements</li> <li>Border restrictions and declaration</li> <li>Mining</li> <li>Taxation</li> <li>Other Canadian legislative requirements</li> </ul> <p>We are pleased to be able to make this <a href="/-/media/files/kh-general/stikeman-elliott---blockchain--cryptocurrency-regulation-2024.ashx">16-page publication</a> available for downloading.</p>03-Nov-2023 05:04:00{3862AFA3-979F-4A8A-82B2-2861D5C479DE}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-explores-use-of-ai-in-capital-marketsStikeman ElliottCanadian Securities LawOSC Explores Use of AI in Capital Markets<p><strong>The Ontario Securities Commission (“OSC”) and Ernst & Young LLP recently published </strong><a rel="noopener noreferrer" target="_blank" href="https://oscinnovation.ca/resources/Report-20231010-artificial-intelligence-in-capital-markets.pdf"><strong><em>Artificial Intelligence in Capital Markets: Exploring Use Cases in Ontario</em></strong></a><strong> (the “Report”), which examines current artificial intelligence (“AI”) use cases, value drivers and challenges. Due to the potentially disruptive nature of AI systems, regulators are considering how oversight, regulation or guidance might facilitate the innovation and adoption of AI in Canada while at the same time protecting investors and maintaining the integrity of the capital markets.</strong></p> <h2>Background</h2> <p>Market participants continue to embrace the use of AI to streamline complex tasks, optimize processes and uncover trends. While AI systems may help organizations complete projects more efficiently and cost-effectively, they must remain aware of and manage AI-related risks.</p> <p>The OSC Innovation Office supports the OSC in its approach to market regulation and response to emerging trends, new technologies and novel business models. Given the transformative potential of AI, the OSC conducted research to better understand and promote awareness of current and future applications of AI in capital markets.</p> <h2>Key Findings</h2> <p>Overall, market participants are implementing AI solutions in a phased approach, prioritizing low-risk applications. Higher-risk applications are more limited and currently used as benchmarks or with human supervision.</p> <p>The Report highlights the following themes:</p> <ul> <li>market participants are currently using AI to enhance their existing products and services rather than creating new ones;</li> <li>AI is at an intermediate stage of adoption in Ontario’s capital markets;</li> <li>key value drivers of AI adoption in capital markets include: (i) enhanced capacity to extract information and insights from large volumes of structured and unstructured data; (ii) greater automation of manual processes that involve handling and managing data; (iii) more precise predictive analytics; (iv) better liquidity forecasting and hedging; and (v) increased end-user satisfaction through more personalized service;</li> <li>the most mature use of AI in capital markets is focused on: (i) improving the efficiency and accuracy of operational processes; (ii) trade surveillance and detection of market manipulation; and (iii) supporting advisory and customer service;</li> <li>the use of AI in asset allocation and risk management is less mature in Canada;</li> <li>scale is important for the development of AI models: larger firms appear to be developing in-house solutions and using AI more than smaller firms due to the significant investment required;</li> <li>AI development primarily occurs in-house in Ontario;</li> <li>while market participants continue to employ and explore a range of AI techniques, natural language processing is the most used; and</li> <li>major challenges remain for AI adoption, including data constraints, attracting and retaining skilled labour and concerns relating to privacy, bias, fairness, explainability and interpretability.</li> </ul> <h2>AI Governance</h2> <p>Many organizations that implement AI solutions continue to rely on existing governance and compliance frameworks and personnel. The Report suggests that firms should consider adopting a robust, AI-specific governance framework as risks associated with AI systems are distinct and require measures beyond traditional approaches. Such risks include issues related to risk measurement and tracking, reliance on third-party models, use of open-source material and lack of transparency. Individuals who possess AI expertise and domain knowledge should help establish and oversee the governance program, as they are better equipped to understand these unique risks.</p> <h2>What’s Next?</h2> <p>The OSC indicates that continuing to identify and understand the use of AI, its risks and potential in Ontario’s capital markets is a key priority. While OSC Staff view the Report as an important first step, further collaboration between market participants, innovators, federal and provincial governments, securities regulators and financial services regulators is needed to develop consistent regulation and support responsible AI innovation and adoption. International collaboration through forums such as the International Organization of Securities Commissions is also required to develop comparable global standards.</p>02-Nov-2023 03:08:00{E6A0234F-27F1-4A67-ABD0-2FE10C85E4AA}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-investment-funds-and-structured-products-branch-reports-on-2022-2023Stikeman ElliottCanadian Securities LawOSC Investment Funds and Structured Products Branch Reports on 2022-2023<p><strong>The Investment Funds and Structured Products Branch (“IFSP”) of the Ontario Securities Commission (“OSC”) released its </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-09/20230913_81-734_IFSP-summary-report.pdf"><strong>Summary Report for Investment Fund and Structured Product Issuers</strong></a><strong> for the fiscal year ended March 31, 2023 (the “Report”). The Report provides an overview of IFSP’s recent operational and policy initiatives, which included an increased focus on continuous disclosure reviews.</strong></p> <h2>Report Highlights</h2> <h3>What is an investment fund?</h3> <p>As in previous years, the Report describes the role and responsibilities of IFSP and the investment fund market landscape – according to which funds in Canada had approximately C$2.3 trillion in assets under management as of March 31, 2023. This year, IFSP Staff also outline criteria that may be considered when stakeholders evaluate whether a product is an investment fund, as they continue to receive many questions on this topic. The non-exhaustive factors include: (i) the ability to redeem and frequency of redemptions; (ii) calculation of net asset value and investor entitlement; (iii) no active management of underlying assets; (iv) no control of underlying issuers; (v) operations and purpose of the issuer; and (vi) investor expectations.</p> <h3>Filings and reviews</h3> <p>Since there were fewer prospectus filings and applications for exemptive relief in the last fiscal year, IFSP Staff’s oversight focused more on continuous disclosure reviews. IFSP Staff also continued to monitor crypto asset and environmental, social and governance-related (“ESG-related”) funds, both of which have evolved quickly in recent years.</p> <p>Notwithstanding the decline in prospectus filings, the Report highlights novel filings related to decumulation and single stock exchange-traded funds that were receipted during the past year. It also shares IFSP Staff’s observations from their prospectus reviews of ESG-related funds, following the publication of the Canadian Securities Administrators’ guidance to support the improvement of ESG-related fund disclosure, which we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-provide-disclosure-guidance-to-investment-funds-engaged-in-esg-investing">previous post</a>. Most of the issues from these reviews concerned the disclosure of investment strategies; however, IFSP Staff raised and resolved issues pertaining to fund names, investment objectives, risk disclosure and summaries of proxy voting policies and procedures as well.</p> <p>While applications for exemptive relief similarly decreased, IFSP Staff note that novel relief was granted in respect of the custody of physical battery metals and value-at-risk-based leverage exposure limits.</p> <p>By contrast, the Report provides an extensive summary of major continuous disclosure reviews completed in the last fiscal year, for which IFSP Staff assessed:</p> <ul> <li>crypto asset funds’ continuous disclosure documents and custody of assets, which we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-release-guidance-on-public-crypto-asset-funds">recent post</a>;</li> <li>ESG-related funds’ continuous disclosure, sales communications and portfolio holdings;</li> <li>simplified prospectuses;</li> <li>independent review committees;</li> <li>change of auditor notifications;</li> <li>reports of exempt distributions;</li> <li>standard continuous disclosure filings;</li> <li>investment fund exposure to European bank contingent convertible bonds and the U.S. banking sector; and</li> <li>marketing materials.</li> </ul> <h3>Regulatory policy</h3> <p>Modernization and burden reduction remain at the forefront of IFSP’s policy initiatives. Notable initiatives that were completed or ongoing during the last fiscal year relate to the:</p> <ul> <li>development of an access-based model for investment fund reporting issuers;</li> <li>investment fund settlement cycle, which we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-to-eliminate-exception-reporting-requirement-and-extend-moratorium">previous post</a>;</li> <li>proposed modernization of the prospectus filing model, which we also discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-modernization-of-prospectus-filing-for-investment-funds">previous post</a>;</li> <li>modernization of continuous disclosure documents; and</li> <li>review of principal distributor practices.</li> </ul> <h3>Emerging issues and initiatives</h3> <p>IFSP Staff also identify several trends and initiatives that will impact funds going forward. These include the:</p> <ul> <li>amendments to OSC Rule 13-502 <em>Fees</em>, which came into force on April 3, 2023, as we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/changes-to-ontario-fee-rules-to-take-effect-in-april">previous post</a>;</li> <li>transition to SEDAR+, which went live on July 25, 2023, as we also discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-defer-launch-of-sedar-new-target-is-july-25-2023">previous post</a>;</li> <li>discontinuation of the Canadian Dollar Offered Rate, which will no longer be published after June 28, 2024;</li> <li><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/en/industry/investment-funds-and-structured-products/investment-fund-survey/investment-fund-survey-data">Investment Fund Survey</a>, the 2024 version of which is expected to be launched in January 2024; and</li> <li>increasing incidence of cybersecurity breaches.</li> </ul>30-Oct-2023 07:06:00{2F65DADC-6D5B-4CCF-8431-4EF650E7CB7E}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-approves-permanent-exemption-from-underwriting-conflicts-disclosure-requirementsStikeman ElliottCanadian Securities LawOSC Approves Permanent Exemption from Underwriting Conflicts Disclosure Requirements for Foreign Private Placements<p><strong>The Ontario Securities Commission (“OSC”) recently made proposed </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-10/rule_20231005_33-509_commission-approval.pdf"><strong>OSC Rule 33-509 <em>Exemption from Underwriting Conflicts Disclosure Requirements</em></strong></a><strong> (the “Rule”) to provide a permanent exemption in Ontario from the underwriting conflicts disclosure requirements in National Instrument 33-105 <em>Underwriting Conflicts</em> in respect of foreign private placements to sophisticated investors.</strong></p> <p>As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-further-streamlines-foreign-private-placements-in-ontario">previous post</a>, the OSC issued Ontario Instrument 33-507 <em>Exemption from Underwriting Conflicts Disclosure Requirements (Interim Class Order)</em> (the “Blanket Order”) in February 2021 that provided a temporary exemption from the underwriting conflicts disclosure requirements where: (i) the distribution is made under an exemption from the prospectus requirement; (ii) the distribution is of an eligible foreign security; and (iii) each purchaser in Ontario is a permitted client. The Blanket Order was <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-extends-exemption-from-underwriting-conflict-disclosure-requirements-for-foreign-private">extended in March 2022</a> and is currently set to expire on February 17, 2024.</p> <p>The Rule will make the exemption set out in the Blanket Order permanent. The OSC has indicated that without an extension, institutional investors in Ontario may again experience difficulties in participating in global offerings on a timely basis.</p> <p>The Rule was delivered to the Minister of Finance and will come into force on February 17, 2024, if approved.</p>19-Oct-2023 03:39:00{81A6D244-E9D1-439D-B456-C09CE79C8FEB}https://www.stikeman.com/en-ca/kh/canadian-securities-law/virtual-currency-regulation-in-canada-a-changing-landscape-comes-into-focusAlix d'Anglejan-Chatillonhttps://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillonRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalÉric Lévesquehttps://www.stikeman.com/en-ca/people/l/eric-levesqueChristian Vieirahttps://www.stikeman.com/en-ca/people/v/christian-vieiraCanadian Securities LawVirtual Currency Regulation in Canada: A Changing Landscape Comes Into Focus<p>Four Stikeman Elliott lawyers – <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillon"><strong><span style="text-decoration: underline;">Alix d’Anglejan-Chatillon</span></strong></a>, <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/people/g/ramandeep-k-grewal"><strong><span style="text-decoration: underline;">Ramandeep Grewal</span></strong></a>, <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/people/l/eric-levesque"><strong><span style="text-decoration: underline;">Éric Lévesque</span></strong></a> and <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/people/v/christian-vieira"><strong><span style="text-decoration: underline;">Christian Vieira</span></strong></a> – recently updated <a href="/-/media/files/kh-general/stikeman-elliott---the-virtual-currency-regulation-review2023.ashx">the Canada chapter</a> of <a rel="noopener noreferrer" target="_blank" href="https://thelawreviews.co.uk/title/the-virtual-currency-regulation-review">The Virtual Currency Regulations (6<sup>th</sup> edition)</a>, published by <a rel="noopener noreferrer" target="_blank" href="https://www.lbresearch.com/">Law Business Research Ltd</a>. The chapter provides an excellent overview of this rapidly developing area of law in Canada, focusing on the following topics:</p> <ul> <li>Introduction to the legal and regulatory framework</li> <li>Securities and investment laws</li> <li>Banking and money transmission</li> <li>Anti-money laundering</li> <li>Regulation of exchanges</li> <li>Regulation of miners</li> <li>Regulation of issuers and sponsors</li> <li>Criminal and civil fraud and enforcement</li> <li>Tax</li> <li>Other issues</li> <li>Looking ahead</li> </ul> <p>We are pleased to be able to make this <a href="/-/media/files/kh-general/stikeman-elliott---the-virtual-currency-regulation-review2023.ashx">14-page publication</a> available for downloading.</p>27-Sep-2023 08:32:00{AD96E351-0891-41E7-A6A1-62D037BF8872}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-amendments-to-shelf-prospectus-regime-for-swksisColin Burnhttps://www.stikeman.com/en-ca/people/b/colin-burnJeff Hershenfieldhttps://www.stikeman.com/en-ca/people/h/jeff-hershenfieldDavid Tardifhttps://www.stikeman.com/en-ca/people/t/david-tardifCanadian Securities LawCSA Propose Amendments to Shelf Prospectus Regime for WKSIs<p><strong>On September 21, 2023, the Canadian Securities Administrators (“CSA”) announced </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-09/csa_20230921_44-102_rfc-shelf-distributions.pdf"><strong>proposed amendments to National Instrument 44-102 Shelf Distributions (“NI 44-102”) relating to well-known seasoned issuers ("WKSIs")</strong></a> <strong>as well as consequential amendments to other rules and policies that would formalize and modify in certain respects the previously introduced expedited shelf prospectus regime for WKSIs in Canada (the “Proposed Amendments”). The Proposed Amendments have been published for a 90-day comment period, which expires on December 20, 2023. </strong></p> <h2>Background</h2> <p>The CSA received feedback from market participants that certain base shelf prospectus requirements create unnecessary regulatory burdens for large, established issuers that have a strong market following and a complete public disclosure record. Stakeholders recommended that the CSA implement a Canadian version of the WKSI regime that exists in the United States to assist certain issuers with raising capital on a more expedited basis.</p> <p>As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/temporary-relief-will-provide-well-known-seasoned-issuers-with-accelerated-access">previous post</a>, in December 2021, members of the CSA issued local blanket orders that provide temporary exemptions from certain base shelf prospectus requirements for qualifying WKSIs (the “Blanket Orders”). The Blanket Orders allow eligible issuers to file and receive a receipt for a final base shelf prospectus on an accelerated basis without first filing a preliminary base shelf prospectus.</p> <p>Since January 2022, the CSA have reviewed the use of the Blanket Orders and considered feedback from stakeholders in order to determine how to implement a more permanent Canadian WKSI regime through amendments to the rules. The CSA considered replicating the provisions set out in the Blanket Orders but believe that the Proposed Amendments are more responsive to stakeholder feedback and would increase market efficiency to a greater extent. While the Blanket Orders remain in effect, they would be replaced by the Proposed Amendments, if adopted.</p> <h2>The Proposed Amendments</h2> <p>Under the Proposed Amendments, an issuer will be eligible to take advantage of the WKSI regime if it is not an investment fund and is and has been a reporting issuer in a jurisdiction of Canada for the preceding three years (such proposed seasoning period being significantly longer than the 12-month period under the Blanket Orders), it is eligible to file a short form prospectus and it has either: (i) qualifying public equity of at least C$500,000,000; or (ii) qualifying public debt of at least C$1,000,000,000.</p> <p>The Proposed Amendments would permit issuers that satisfy the qualification criteria to:</p> <ul> <li>file a final base shelf prospectus and be deemed to receive a receipt for that prospectus upon filing without first filing a preliminary base shelf prospectus or undergoing (at least generally) any regulatory review;</li> <li>omit certain disclosure from the base shelf prospectus, including the aggregate dollar amount of securities that may be raised; and</li> <li>benefit from a deemed receipt that will be effective for 37 months from the date of its deemed issuance, subject to annual confirmation of continued WKSI eligibility.</li> </ul> <p>The CSA believe that the Proposed Amendments will provide more certainty regarding transaction timing and facilitate cross-border offerings, as the timing of filings in Canada and the United States will become more aligned.</p> <p>The United States WKSI regime provides eligible issuers with a high degree of control over when their base shelf prospectus is made effective with the Securities and Exchange Commission and publicly available on EDGAR. Typically, such issuers would file their base shelf prospectus and a corresponding prospectus supplement after markets close in connection with the launch of a transaction, effectively giving such issuers immediate access to the market. That level of control over timing allows such issuers to avoid inadvertently alerting the market to a potential transaction prior to launch.</p> <p>By contrast, while the Blanket Orders significantly reduced the timing delays associated with filing a base shelf prospectus, they did not provide a similar degree of control over when a base shelf prospectus would be receipted and made public. While Canadian regulators have historically been receptive to eligible issuers’ pre-filing requests to provide prospectus receipts at or around a specified time in an effort to better align Canadian WKSI filing procedures with those in the United States, the risks of misalignment in the context of the launch of an underwritten cross-border offering remained a material concern for many market participants. We believe that the control over timing resulting from the deemed receipt included in the Proposed Amendments is responsive to stakeholder feedback and significantly reduces existing concerns for eligible issuers seeking to coordinate the launch of a cross-border marketed offering using the WKSI procedures.</p> <h3>Differences between the Blanket Orders and the Proposed Amendments</h3> <p>Although the Proposed Amendments largely follow the Blanket Orders, there are certain differences between the Blanket Orders and the Proposed Amendments, which include:</p> <table> <thead> <tr> <td> <p><strong>Blanket Orders</strong></p> </td> <td> <p><strong>Proposed Amendments</strong></p> </td> </tr> </thead> <tbody> <tr> <td colspan="2" scope="row" style="display:none; margin:-20px; padding:-20px;"> </td> </tr> <tr> <td colspan="2"><p><strong>WKSI eligibility</strong></p></td> </tr> <tr> <td> <p>“Public float” is defined as the aggregate market value of the issuer’s securities held by persons or companies that are not affiliated parties of the issuer and is calculated by using the price at which the securities were last sold in the principal market for the securities as of a date within 60 days preceding the date of filing the base shelf prospectus.</p> </td> <td> <p>“Qualifying public equity” is defined as the aggregate market value of the issuer’s listed equity securities, excluding securities held by affiliates or reporting insiders of the issuer, and is calculated using the simple average of the daily closing price of the issuer’s equity securities on a short form eligible exchange for each of the trading days on which there was a daily closing price for the 20 trading days preceding the date of calculation (which must be within 60 days of the date of filing the base shelf prospectus).</p> </td> </tr> <tr> <td> <p>An issuer that files a WKSI base shelf prospectus must have been a reporting issuer in at least one jurisdiction in Canada for the previous 12 months.</p> </td> <td> <p>An issuer that files a WKSI base shelf prospectus must have been a reporting issuer in at least one jurisdiction in Canada for the previous three years.</p> </td> </tr> <tr> <td colspan="2"> <p><strong>Filing requirements</strong></p> </td> </tr> <tr> <td> <p>An issuer must file a letter in place of the preliminary prospectus that states: (i) its reliance on the Blanket Orders; (ii) its public float and the date of that determination; (iii) the provision under which it is short-form eligible; and (iv) if it has mining operations, the basis on which it satisfies the applicable requirements.</p> <p>The letter must also certify that the issuer has satisfied all WKSI qualification criteria and filing requirements.</p> </td> <td> <p>In addition to the qualification certificate required by section 4.1(1)(a)(ii) of National Instrument 44-101 <em>Short Form Prospectus Distributions</em>, the base shelf prospectus must disclose: (i) the issuer’s reliance on the WKSI rules; and (ii) the value of its qualifying public equity (or qualifying public debt) that establishes that the issuer is a WKSI and the corresponding date.</p> </td> </tr> <tr> <td colspan="2"> <p><strong>Timing of receipt</strong></p> </td> </tr> <tr> <td> <p>There is an accelerated receipt mechanism.</p> </td> <td> <p>A receipt is deemed to be issued upon filing the base shelf prospectus. The automatic receipt mechanism was introduced to provide increased certainty regarding transaction timing and provide for better alignment with the procedures in the United States for making a registration statement effective.</p> </td> </tr> <tr> <td> <p>The Blanket Orders do not contain specific provisions relating to receipt effectiveness. Under NI 44-102, a receipt is effective for up to 25 months.</p> </td> <td> <p>The deemed receipt will be effective for up to 37 months.</p> </td> </tr> <tr> <td colspan="2"> <p><strong>Annual confirmation</strong></p> </td> </tr> <tr> <td> <p>There is no requirement to conduct an annual confirmation.</p> </td> <td> <p>An issuer must confirm its WKSI eligibility each year by including a statement in its annual information form or in an amendment to its WKSI base shelf prospectus.</p> <p>An issuer that is no longer eligible must publicly announce that it will not distribute securities under a prospectus supplement to the WKSI base shelf prospectus and withdraw its base shelf prospectus</p> </td> </tr> </tbody> </table> <p>Some jurisdictions, including Ontario, are also contemplating amendments to local laws to allow for the automatic receipt mechanism contemplated by the Proposed Amendments.</p>26-Sep-2023 05:32:00{3553501A-C0AB-4B65-A78C-D978F18E202A}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-release-guidance-on-public-crypto-asset-fundsAlix d'Anglejan-Chatillonhttps://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillonRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalHalyna Chumakhttps://www.stikeman.com/en-ca/people/c/halyna-chumakCanadian Securities LawCSA Release Guidance on Public Crypto Asset Funds<p><strong>This summer</strong><strong>, the Canadian Securities Administrators (“CSA”) published </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-07/csa_20230706_81-336_guidance-on-crypto-asset-funds.pdf"><strong>CSA Staff Notice 81-336 <em>Guidance on Crypto Asset Investment Funds that are Reporting Issuers</em></strong></a><strong> (the “Notice”) concerning funds that seek to invest in crypto assets, either directly or indirectly, under National Instrument 81-102 <em>Investment Funds</em> (“NI 81-102”) (“Public Crypto Asset Funds”). The Notice describes the market for Canadian Public Crypto Asset Funds and key findings from CSA Staff reviews of such funds. It also provides guidance on the CSA’s expectations for stakeholders on certain operational matters but does not otherwise create any new or modify any existing legal requirements.</strong></p> <h2>Background</h2> <p>A number of Public Crypto Asset Funds have launched since the first prospectus receipt for a Canadian Public Crypto Asset Fund was issued on April 1, 2020. According to the Notice, there were 22 Public Crypto Asset Funds in Canada as of April 30, 2023, with approximately $2.86 billion in collective net assets. At present, these funds invest only in bitcoin and/or ether primarily through direct holdings of these crypto assets. Public Crypto Asset Funds are subject to the same regulatory framework as other publicly distributed investment funds in Canada.</p> <h2>Key Findings</h2> <p>The Notice states that, as part of their general oversight mandate, and in response to issues that have arisen in crypto asset markets, CSA Staff reviewed Public Crypto Asset Funds that directly hold crypto assets and are primarily structured as exchange-traded funds (“ETFs”). Focusing on liquidity, ETF structure and custody, CSA Staff observed the following in respect of funds reviewed:</p> <ul> <li>the funds had not experienced any material difficulties in meeting redemption requests, and investment fund managers (“IFMs”) reported using various approaches to manage liquidity risk (e.g., ongoing portfolio management; continuous liquidity assessments of the underlying crypto assets; ongoing monitoring of relationships with liquidity providers; ensuring the availability of alternative liquidity sources);</li> <li>most of the ETFs traded very closely to their net asset value (“NAV”);</li> <li>the ETFs were able to meet large redemption requests as part of their normal operating procedures and without needing to borrow cash; all redeemed securities were paid in cash at NAV based on their valuation index, with settlement on the next business day; and</li> <li>various custody requirements were being met (e.g., requirements related to segregation, storage, recordkeeping, controls and procedures and insurance).</li> </ul> <h2>Further Guidance</h2> <p>CSA Staff also identified several areas that may warrant further guidance. These include: (i) crypto asset and crypto asset market characteristics; (ii) custody requirements; (iii) the staking of crypto assets; and (iv) know-your-product (“KYP”), know-your-client (“KYC”) and suitability obligations.</p> <h3>Crypto asset and crypto asset market characteristics</h3> <p>The CSA note that the characteristics of a crypto asset and its market are essential to determining whether the crypto asset is a suitable investment for a publicly distributed investment fund. The most important considerations include but are not limited to: (i) the ability to determine a fair value of the crypto asset; (ii) the crypto asset’s liquidity; and (iii) the crypto asset’s classification and related implications.</p> <h4>Valuation</h4> <p>The CSA also observe that crypto asset markets now span a wide spectrum in terms of maturity. The more efficient and transparent a market’s facilities, the more it will be able to support the operations of a Public Crypto Asset Fund. To this end, a market for any crypto asset in which a fund seeks to invest should support the fund’s ability to calculate its NAV in accordance with National Instrument 81-106 <em>Investment Fund Continuous Disclosure</em>. When analyzing whether a prospectus receipt for such fund should be issued, CSA Staff will consider the market and whether:</p> <ul> <li>there is sufficient evidence of an active market for the crypto asset comprising actual and regularly occurring market transactions on an arm’s length basis;</li> <li>there is a regulated futures market for that crypto asset; and</li> <li>there are publicly available indices administered by a regulated index provider for the crypto asset.</li> </ul> <p>In light of these criteria, the CSA believe that the markets for bitcoin and ether best support the operations of Public Crypto Asset Funds at this time. They note, however, that, with greater institutional support and mainstream adoption, other crypto assets may become suitable investments for publicly distributed investment funds in the future.</p> <h4>Liquidity</h4> <p>When contemplating an investment in a crypto asset, funds must conduct due diligence to determine whether the crypto asset is of sufficient liquidity to comply with NI 81-102. Given the general volatility in the markets for crypto assets and recent market failures, the CSA emphasize the need for effective liquidity risk management programs that include stress testing, ongoing monitoring and regular program review.</p> <h4>Classification</h4> <p>The CSA also expect funds to conduct due diligence to determine whether a crypto asset in which they propose to invest is a security or derivative and may be subject to additional securities law requirements and restrictions. As the properties of a crypto asset may change materially over time, Public Crypto Asset Funds must update their due diligence regularly for continued compliance.</p> <h3>Custody requirements</h3> <p>Public Crypto Asset Funds are subject to the custody requirements in NI 81-102. Their portfolio assets must be held by qualifying custodians or sub-custodians, and crypto assets raise unique custodial considerations, including expertise and infrastructure tailored to the safekeeping of this asset type.</p> <p>In the Notice, the CSA list several practices that reflect their minimum expectations for the custody of crypto assets of a Public Crypto Asset Fund. These practices include: (i) the selection of a crypto custodian with the necessary experience and expertise; (ii) the primary storage of crypto assets offline, in “cold wallets”; (iii) the segregation of assets, visible on the blockchain; (iv) website security measures; (v) the maintenance of insurance for corporate crime and theft related to the storage of crypto assets; and (vi) the provision of the crypto custodian’s System and Organization Control reports (i.e., SOC-2 Type-2 Reports) to the fund’s auditors. These practices and expectations are substantially similar to the proposed terms and conditions for entities that seek to act as custodians for crypto asset trading platforms in Canada, which we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-expand-commitments-that-are-immediately-required-from-unregistered-crypto-asset">previous post</a>.</p> <h3>Staking crypto assets</h3> <p>In the Notice, “staking” refers to the act of committing or locking crypto assets in smart contracts to permit the owner or their agent to act as a validator for a particular proof-of-stake consensus algorithm blockchain. The CSA continue to monitor the presence and role of staking in the crypto asset industry but are of the view that staking may in some cases involve the issuance of a security or derivative. They expect Public Crypto Asset Funds interested in staking to have established policies and procedures to assess whether their activities involve the issuance of a security and/or derivative. These policies and procedures should include a process for independent analysis of the staking activities and consideration of any statements made by a regulator on whether the staking as contemplated involves the issuance of a security and/or derivative.</p> <p>The CSA highlight that staking may also implicate other securities law requirements and restrictions, such as those related to liquidity, lending and a fund’s characterization as a “non-redeemable investment fund” under NI 81-102. While this and more specific expectations on staking are discussed in the Notice, IFMs are ultimately expected to conduct their own due diligence to determine whether any proposed staking activity will impact the fund’s compliance with illiquid asset restrictions in NI 81-102. The CSA encourage Public Crypto Asset Funds interested in staking to contact their principal regulator to discuss the applicability of securities legislation and possible approaches to compliance.</p> <h3>KYP, KYC and suitability obligations</h3> <p>Registrants must comply with securities law requirements related to KYP, KYC and suitability determinations in connection with purchases or sales of securities of Public Crypto Asset Funds for, or recommendations of Public Crypto Asset Funds to, their clients. The CSA caution that when fulfilling these obligations, registrants should be aware that holding crypto assets, including securities of Public Crypto Asset Funds, comes with elevated levels of risk that may not be suitable for many investors.</p> <h2>What’s Next?</h2> <p>The Notice should be reviewed for further guidance as certain matters discussed in the Notice may become the subject of future CSA policy work.</p> <p>Separately, the Office of the Superintendent of Financial Institutions (“OSFI”) has also launched a <a rel="noopener noreferrer" target="_blank" href="https://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/crypto-bnk-ins-nr.aspx?utm_source=osfi-bsif&utm_medium=email&utm_campaign=osfi-bsif-email">consultation on the regulatory capital and liquidity treatment of crypto-asset exposures</a>, in response to the new banking standards for crypto-asset exposures released by the Basel Committee on Banking Supervision in December 2022. OSFI published two draft guidelines, for federally regulated deposit-taking institutions and insurers, and comments were open until September 20, 2023. These guidelines will replace the interim advisory on the regulatory treatment of crypto-asset exposures, published in August 2022, when they come into effect in early 2025.</p>22-Sep-2023 06:55:00{5AA56E87-669F-46E1-8585-CB17A2A0915C}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-approves-extension-of-temporary-exemption-from-oeo-trailer-banStikeman ElliottCanadian Securities LawOSC Approves Extension of Temporary Exemption from OEO Trailer Ban<p><strong>The Ontario Securities Commission (“OSC”) recently published </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-08/rule_20230831_81-509_notice-of-board-approval.pdf"><strong>OSC Rule 81-509 <em>Extension to Ontario Instrument 81-508 Temporary Exemptions from the OEO Trailer Ban to Facilitate Dealer Rebates of Trailing Commissions and Client Transfers</em></strong></a><strong> (the “Rule”). The Rule extends the temporary relief from the order-execution only (“OEO”) trailer ban granted previously for an additional 18 months.</strong></p> <p>As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-adopt-restrictions-on-mutual-fund-trailing-commissions">previous post</a>, the OEO trailer ban was adopted in June 2022 through amendments to National Instrument 81-105 <em>Mutual Fund Sales Practices</em>, in response to investor protection and market efficiency issues identified with the payment and acceptance of dealer trailing commissions where no suitability determination is required. Dealers that do not have an obligation to make suitability determinations include OEO dealers and dealers acting on behalf of a “permitted client” that has waived suitability requirements.</p> <p>To facilitate client transfers and rebates of trailing commissions as required to implement the OEO trailer ban, the Canadian Securities Administrators (“CSA”) issued blanket orders to temporarily exempt investment fund managers (“IFMs”) and OEO dealers from the ban, as we also discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/regulators-issue-temporary-exemptions-from-the-oeo-trailer-ban">previous post</a>. Whereas Ontario’s blanket order came into effect on June 1, 2022, and expires on November 30, 2023, equivalent orders in other CSA jurisdictions are either not subject to an expiration date or expected to be extended beyond November 30, 2023.</p> <p>To allow for the continued provision of certain dealer rebates and grace periods, and so as not to disadvantage IFMs and OEO dealers in Ontario, the OSC made the Rule to extend the existing relief until May 31, 2025. The Rule was delivered to the Minister of Finance and will come into force on December 1, 2023, if approved.</p>21-Sep-2023 04:27:00{07B296A3-93F1-40EF-A34A-64C49C9A1926}https://www.stikeman.com/en-ca/kh/canadian-securities-law/regulators-announce-repeal-of-national-instrument-81-104-alternative-mutual-fundsStikeman ElliottCanadian Securities LawRegulators Announce Repeal of National Instrument 81-104 Alternative Mutual Funds<p>On August 31, 2023, the <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-08/20230831_81-104_alternative-mutual-funds.pdf">Canadian Securities Administrators ("CSA") announced the repeal</a> of <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/en/securities-law/instruments-rules-policies/8/81-104/unofficial-consolidation-national-instrument-81-104-alternative-mutual-funds">National Instrument 81-104 <em>Alternative Mutual Funds</em></a> (“NI 81-104”) in all jurisdictions except Québec.</p> <p>As part of the CSA’s Modernization of Investment Fund Product Regulation Project, the sections of NI 81-104 that previously set out a regulatory regime for alternative mutual funds were <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/pdfs/irps/csa_20181004_81-102_alternative-mutual-funds.pdf">repealed in 2018</a>, and most operational aspects of NI 81-104 were migrated to <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2022-01/ni_20220106_81-102_unofficial-consolidation_0.pdf">National Instrument 81-102 <em>Investment Funds</em></a>. As a result, only the proficiency and supervisory requirements for mutual fund restricted individuals trading in securities of alternative mutual funds remain in the current version of NI 81-104.</p> <p>However, as we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-extends-proficiency-exemption-for-alternative-mutual-fund-trading">previous post</a>, the proficiency requirements in NI 81-104 pre-date the introduction of the alternative mutual funds regime, and the CSA issued blanket relief to provide additional course options for individuals seeking to meet applicable proficiency requirements. As the blanket orders have now been codified in the Canadian Investment Regulatory Organization’s (“CIRO’s”) <a rel="noopener noreferrer" target="_blank" href="https://www.ciro.ca/media/21/download?inline">Interim Mutual Fund Dealer Rule 1000 <em>Proficiency Standards for the Sale of Alternative Mutual Funds</em></a>, the CSA have determined that NI 81-104 is no longer necessary.</p> <p>In Québec, the Autorité des marchés financiers (“AMF”) intends to continue to rely on the local blanket order in respect of the applicable proficiency requirements. The AMF has indicated that it will consider repealing NI 81-104 and revoking the local blanket order once it undertakes a transition plan for Québec’s mutual fund dealer membership in CIRO.</p> <p>Provided that all ministerial approvals are obtained, the repeal of NI 81-104 will come into force on January 29, 2024.</p>18-Sep-2023 01:14:00{DD1D77C8-ABF7-404D-9DFE-AC1656819E9E}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-publishes-annual-compliance-report-for-dealers-advisers-and-investment-fund-managersAlix d'Anglejan-Chatillonhttps://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillonDarin R. Rentonhttps://www.stikeman.com/en-ca/people/r/darin-r-rentonCanadian Securities LawOSC Publishes Annual Compliance Report for Dealers, Advisers and Investment Fund Managers for 2022-2023<p>The Ontario Securities Commission (“OSC”) recently released its annual <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-07/sn_33-755_crr-branch-summary-report-2023.pdf">Summary Report for Dealers, Advisers and Investment Fund Managers</a> (the “Report”), prepared by the Compliance and Registrant Regulation Branch, for the 2022-2023 fiscal year.</p> <p>As in previous years, the Report provides an overview of the OSC’s compliance initiatives over the past year and is divided into four parts related to: (i) education and outreach; (ii) regulatory oversight activities and guidance for registrants (which may serve as a self-assessment tool to strengthen compliance); (iii) initiatives impacting registrants; and (iv) OSC Staff action taken in response to registrant misconduct.</p> <p>The OSC reported that its activities over the past year focused on the following:</p> <ul> <li>compliance sweeps of high-impact firms, firms with limited compliance staff, registered firms that distribute mortgage investment entities (“MIEs”) and crypto asset trading platforms’ (“CTPs’”) custodial arrangements;</li> <li>reviews of the implementation of the client focused reforms (“CFRs”) in conjunction with the Canadian Securities Administrators and the Canadian Investment Regulatory Organization (“CIRO”), certain results of which were published in a report on registrants’ conflicts of interest practices, discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-and-ciro-publish-review-of-registrants-conflicts-of-interest-practices">recent post</a>; and</li> <li>the formation of a new operational team to focus on specialized dealer business models such as derivatives and restricted dealers.</li> </ul> <h2>Report Highlights</h2> <h3>MIEs</h3> <p>An ongoing desk review of registered firms that distribute MIEs was conducted using a questionnaire to gather information about issuers and MIE loan portfolio performance.</p> <h3>Registrants with limited compliance staff</h3> <p>The OSC continued its sweep of firms with a small number of compliance staff. Although most of these firms were found to have adequate resources and an effective compliance system, common deficiencies related to certain written policies and procedures, reporting to clients, the collection and documentation of know-your-client (“KYC”) information, portfolio manager (“PM”) investment management agreements, books and records, the oversight of service providers, the holding of client assets in trust and documentation to support reliance on the accredited investor exemption.</p> <h3>CTPs</h3> <p>Desk reviews of registered restricted dealer CTPs commenced in February 2023 to examine practices around custodial arrangements, corporate governance structures, insurance bonding policies and the management of conflicts of interest. CTPs already registered or seeking registration were found to have deficiencies with respect to custodial arrangements, compliance practices related to the Chief Compliance Officer’s annual assessment and reporting of compliance structure and business continuity plans and the oversight of marketing materials prepared by third-party service providers.</p> <h3>Investment fund manager (“IFM”) registration considerations</h3> <p>The OSC warns that any agreements with an unregistered market participant that restrict an IFM from exercising its standard of care, including restrictions on an IFM’s ability to change service providers such as PMs and sub-advisers or on its decision-making capacity related to the operation of a fund, are considered to be registrable activity.</p> <h3>Start-up funding portals</h3> <p>OSC Staff reviewed registered exempt market dealers (“EMDs”) with online portals where issuers offer securities by relying on prospectus exemptions such as the crowdfunding exemption. EMDs are advised to be mindful of how insurance requirements might be impacted by access to client assets held in trust during a crowdfunding campaign period. EMDs are also reminded of their obligation to make a suitability determination before accepting a transaction, by taking into account factors such as an investor’s concentration in exempt-market products after the transaction to ensure that they are not overconcentrated. Furthermore, any person entering the portal should acknowledge that they are aware that the portal is operated by a registered dealer who will provide suitability advice.</p> <h3>Custody</h3> <p>Custody-related deficiencies included inadequate reconciliation of client assets between a PM’s internal portfolio management system and custodians’ records and PMs’ failure to maintain their own independent client asset records in violation of their obligation to maintain books and records. In respect of dealers that distribute units of certain investment funds, it was also found that cash-in-transit was not being held in a manner that showed the beneficial ownership of those assets.</p> <h3>Recordkeeping obligations of foreign firms</h3> <p>Foreign-based registrants are required to establish, maintain and apply policies, procedures and controls to reasonably assure that they are able to respond promptly to any requests for information from the OSC. As a part of business risk assessment, any conflicts of laws issues that may impact such registrants’ ability to comply with Ontario securities law and requests from the OSC should be identified and planned for, including those related to confidentiality or privacy in local jurisdictions.</p> <h2>Initiatives Impacting Registrants</h2> <p>Registrants should take note of the following:</p> <ul> <li>The next Risk Assessment Questionnaire (“RAQ”) is anticipated to be sent to registrants in May 2024 by email.</li> <li>Total cost reporting (“TCR”) amendments, which were published on April 20, 2023, and discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/enhanced-total-cost-reporting-for-investment-funds-and-segregated-funds-coming-in-2026">previous post</a>, will expand the annual report on charges and other compensation to include information about the ongoing costs of owning prospectus-qualified investment funds. Firms will have until January 2026 to begin integrating these amendments for delivery to clients in January 2027, after which compliance will be monitored. A TCR Implementation Committee has been established to assist with the interpretation of the TCR requirements and resolution of operational issues.</li> <li>Amendments to the fee rules, which we also discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/changes-to-ontario-fee-rules-to-take-effect-in-april">previous post</a>, became effective on April 3, 2023.</li> <li>Following the amalgamation of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada, which resulted in the creation of CIRO, separate mutual fund and investment dealer businesses are now able to carry on as a single entity by becoming dually registered with the OSC. The OSC and CIRO are considering dual-registered firm applications together, with the first such applicant having become registered on March 24, 2023.</li> <li>Primary oversight of most syndicated mortgages was transferred from the Financial Services Regulatory Authority of Ontario (“FSRA”) to the OSC in July 2021, and the two regulators are jointly coordinating guidance and compliance approaches. A new registration exemption was introduced for exempt firms and individuals that distribute syndicated mortgages to qualified “permitted clients” and qualified syndicated mortgages, provided that they are FSRA-licensed mortgage brokers.</li> <li>Proposed amendments to National Instrument 24-101 <em>Institutional Trade Matching and Settlement</em> that would permanently eliminate the exception reporting requirement are expected to come into force on May 27, 2024. As we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-to-eliminate-exception-reporting-requirement-and-extend-moratorium">previous post</a>, the initial three-year moratorium on exception reporting expired on July 1, 2023, and was replaced by local blanket orders in the interim.</li> </ul> <h2>Looking Ahead</h2> <p>The OSC notes that next year’s compliance oversight activities will continue to consider the effectiveness of the implementation of the CFRs, with a focus on KYC, know-your-product and suitability determinations, compliance reviews of high-risk firms identified through the 2022 RAQ and compliance reviews of CTPs.</p>13-Sep-2023 06:31:00{3136712B-C8E6-4032-9993-304488712CAC}https://www.stikeman.com/en-ca/kh/canadian-ma-law/bill-s-211-in-context-five-ways-that-canada-regulates-forced-and-child-labourCandace Ceronehttps://www.stikeman.com/en-ca/people/c/candace-ceroneAndrew S. Cunninghamhttps://www.stikeman.com/en-ca/people/c/andrew-s-cunninghamBrendan Kennedyhttps://www.stikeman.com/en-ca/people/k/brendan-kennedyShawn C.D. Neylanhttps://www.stikeman.com/en-ca/people/n/shawn-c-d-neylanJean-Guillaume Shoonerhttps://www.stikeman.com/en-ca/people/s/jean-guillaume-shoonerIan Trimblehttps://www.stikeman.com/en-ca/people/t/ian-trimbleCanadian M&A LawCanadian Securities LawCanadian Employment, Labour & Pension LawCorporations & Commercial Law UpdateCanadian Mining LawBill S-211 in Context: Five Ways That Canada Regulates Forced and Child Labour<p><strong>Bill S-211 – the <em>Fighting Against Forced Labour and Child Labour in Supply Chains Act</em> – which requires businesses to report on their efforts to combat forced and child labour, is set to take effect in 2024. In this post, which supplements </strong><a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-ma-law/canadian-legislation-on-forced-and-child-labour-in-global-supply-chains-takes-effect"><strong>our previous posts on Bill S-211</strong></a><strong>, we look at the new legislation in the context of the broader Canadian regulatory landscape affecting what is often referred to internationally as “modern slavery”. </strong></p> <p>In addition to the new legislation, this regulatory context encompasses:</p> <ul> <li>The Canadian Ombudsperson for Responsible Enterprise (“CORE”), with respect to the oil & gas, mining and garment sectors;</li> <li>The <em>Customs Tariff</em>, with respect to control of the importation of goods produced with forced or child labour;</li> <li>The <em>Criminal Code</em>, with respect to the trafficking or exploitation of individuals; and</li> <li>The class actions process, with respect to alleged misrepresentations by businesses of their internal practices, policies and past issues relating to forced and child labour.</li> </ul> <p>While these are arguably the key regulatory initiatives in this area, other factors may be relevant to businesses as they develop their anti-forced and child labour policies. Two of these are also referred to in this post: the international context of the legislation and role of securities regulation in encouraging and potentially enforcing accurate corporate disclosure in this area.</p> <h2>1. Bill S-211: Canada’s New Forced Labour and Child Labour Legislation</h2> <p>As discussed in our <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-ma-law/canadian-legislation-on-forced-and-child-labour-in-global-supply-chains-takes-effect">earlier posts</a>, the <a rel="noopener noreferrer" target="_blank" href="https://laws.justice.gc.ca/eng/acts/F-10.6/index.html"><em>Fighting Against Forced Labour and Child Labour in Supply Chains Act</em></a> (the “Act”; previously Bill S-211) imposes certain reporting obligations in relation to efforts made to reduce the risk of forced and child labour.</p> <p>The stated purpose of the Act is to implement Canada’s international commitment to contribute to the fight against forced labour and child labour through the imposition of <strong>reporting obligations</strong> on business entities (described below) and government institutions (which includes <a rel="noopener noreferrer" target="_blank" href="https://laws-lois.justice.gc.ca/eng/acts/A-1/page-14.html#docCont">individual government departments and many federal agencies</a>).</p> <p>Under the Act, any “entity” – a term that encompasses a corporation, trust, partnership or other unincorporated organization – must file a report annually with the federal government, provided that it satisfies the two following tests:</p> <ol> <li>It is <strong>either</strong> (i) listed on a Canadian stock exchange (in which case, proceed directly to (2)); <strong>or</strong> (ii) does business, has a place of business or has assets in Canada and, in either of its two most recent financial years, has met or exceeded a size threshold based on its consolidated financial statements. The size threshold is any two of: $40 million in revenue, $20 million in assets or 250 employees;<br /> and</li> <li>It produces, sells or distributes goods in Canada or elsewhere and/or imports goods into Canada (or controls any entity that does so).</li> </ol> <p>The annual report must be filed with the Minister of Public Safety and Emergency Preparedness (the “Minister”) and published on the entity’s website before May 31 of each year. The legislation does not contemplate that an entity might not have a website.</p> <p>The exact format of the report, and of its website version, may be further specified by government guidance that is expected in the fall of 2023, but, in general, it will need to describe the steps the entity has taken during its previous financial year to prevent and reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity. The report must also include specified supplementary information pertaining to the entity’s structure, activities and supply chains, as well as information about its training programs and risk assessments as well as its responses to any forced or child labour situations that it has detected.</p> <p>The first report must be filed with the Minister no later than <strong>May 31, 2024</strong>.</p> <p>Persons and entities that fail to comply with certain provisions of the Act, including a failure to file and publish their report, are guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000. Further, the Act extends liability to an entity’s directors, officers, agents and mandataries to the extent that they directed, authorized, assented to, acquiesced in or participated in the commission of an offence.</p> <h3>International context</h3> <p>While new to Canada, many of the reporting requirements that the Act establishes will be familiar to many multinational corporations, because they overlap significantly with existing requirements in the United States (California), United Kingdom, Australia, France, Germany and elsewhere. However, the Canadian legislation has certain distinctive aspects that will require all companies – including multinationals that are already filing in foreign jurisdictions – to ensure that their responses are tailored to Bill S‑211’s specific requirements.</p> <p>The basic approach Canada has taken follows that of the <a rel="noopener noreferrer" target="_blank" href="https://modern-slavery-statement-registry.service.gov.uk/search-results?Search=&t=4&t=5&s=9">U.K.</a>, <a rel="noopener noreferrer" target="_blank" href="https://oag.ca.gov/SB657">California </a>and <a rel="noopener noreferrer" target="_blank" href="https://modernslaveryregister.gov.au/">Australia</a> by requiring entities to focus their disclosure on the steps they are taking to ensure that forced labour and child labour are not present in their supply chains. This “reporting” approach is less demanding than the “diligence” approach underlying the <a rel="noopener noreferrer" target="_blank" href="https://www.economie.gouv.fr/files/files/directions_services/cge/Duty-of-Vigilance.pdf?v=1620744564">French</a> and <a rel="noopener noreferrer" target="_blank" href="https://www.csr-in-deutschland.de/EN/Business-Human-Rights/Supply-Chain-Act/supply-chain-act.html">German</a> legislation (note that <a rel="noopener noreferrer" target="_blank" href="https://www.ag.gov.au/crime/publications/report-statutory-review-modern-slavery-act-2018-cth">Australia is considering whether to move to a diligence model</a>). That approach requires entities to actively investigate their suppliers and to report on the results of those investigations.</p> <p>Many multinational corporations that are subject to multiple forced and child labour reporting requirements produce a single combined statement to addresses the requirements across each regime, and it is likely that this approach can be extended to Canada to meet the requirement to post compliance information on the corporate website. However, unlike some other jurisdictions, Canada also requires that a report addressing a list of specified topics be filed with the government for publication on a searchable government website. (In other words, unlike the U.K., for example, the Canadian government website will not simply link to the website statements of the reporting entities.) In the absence (so far) of formal reporting guidelines under the Act, Canadian corporations not already subject to reporting requirements in foreign countries may find it useful to review reports filed by their peers in other jurisdictions to inform their responses. The <a rel="noopener noreferrer" target="_blank" href="https://modern-slavery-statement-registry.service.gov.uk/search-results?Search=&t=4&t=5&s=9">U.K. site</a>, for example, is easily searchable and can be broken down by sector and size of business.</p> <p>While the Act, like its counterparts in other jurisdictions, does not itself include substantive prohibitions on the use of forced and child labour, businesses should be mindful of the potential application of other statutes, notably the <em>Criminal Code</em>, in cases where forced and child labour are used, whether this occurs domestically or in foreign countries. The applicability of the <em>Criminal Code</em> is discussed in Section 4 of this post.</p> <h2>2. The CORE: Ongoing Investigations in the Mining and Garment Sectors</h2> <p>Canadian companies in three specific sectors – mining, oil & gas and apparel – are also subject to investigations into alleged human rights abuses in their international operations by the <a rel="noopener noreferrer" target="_blank" href="https://stikeman.com/en-ca/kh/canadian-energy-law/CORE-New-Federal-Office-to-Investigate-Human-Rights-Complaints-Against-Canadian-Multinationals">Canadian Ombudsperson for Responsible Enterprise</a>. Although the CORE does not have any direct enforcement powers, it can refer complaints that raise criminal liability to law enforcement, make recommendations to the company (e.g., compensation, mitigation measures, apologies) and monitor subsequent compliance, and make recommendations for the withdrawal of federal support (e.g., trade advocacy).</p> <p>On July 11, 2023, the CORE published its initial assessments into allegations that two businesses – <a rel="noopener noreferrer" target="_blank" href="https://core-ombuds.canada.ca/core_ombuds-ocre_ombuds/activities-nike-canada-corp-activities.aspx?lang=eng">one in the apparel sector</a> (the “First Apparel Business”) and <a rel="noopener noreferrer" target="_blank" href="https://core-ombuds.canada.ca/core_ombuds-ocre_ombuds/activities-dynasty-gold-corp-activities.aspx?lang=eng">one in the mining sector</a> (the “Mining Business”) have relationships with businesses based in China that have used or benefitted from Uyghur forced labour.</p> <p>On August 15, 2023, the CORE published two more initial assessments relating to allegations: one <a rel="noopener noreferrer" target="_blank" href="https://core-ombuds.canada.ca/core_ombuds-ocre_ombuds/activities-gobimin-activities.aspx?lang=eng">in relation to an investment company</a> that formerly held an interest in a mining company (the “Investment Business”) and one <a rel="noopener noreferrer" href="https://core-ombuds.canada.ca/core_ombuds-ocre_ombuds/activities-ralph-lauren-activities.aspx?lang=eng" target="_blank">into a second apparel business</a> (the “Second Apparel Business”).</p> <p>All four allegations were made by a coalition of 28 Canadian organizations (the “Complainants”) on June 21, 2022 (as noted below, three further allegations made by these organizations were also considered by the CORE in late August).</p> <h3>The First Apparel Business investigation</h3> <p>The initial assessment report for the First Apparel Business states that the company declined the CORE’s request for an initial meeting on the basis that its previously published statements responded fully to the concerns raised. The CORE assessment report states that upon receiving a draft of the initial assessment report, the First Apparel Business engaged with the CORE and requested a meeting at that point, which was declined by the CORE.</p> <p>On reviewing the submissions of the Complainants and the First Apparel Business, the ombudsperson agreed that there was a need for further investigation of relationships between certain suppliers and other entities that had been associated with forced labour and of the sufficiency of the human rights due diligence efforts of the First Apparel Business. The fact that the First Apparel Business had initially declined to meet with the CORE appears to have factored into the decision.</p> <h3>The Mining Business investigation</h3> <p>The Mining Business reportedly did not respond at all to repeated inquiries, although it did make submissions after receiving the CORE’s draft initial assessment. This case involved a mining operation in China that was established as a joint venture. The Mining Business was one of the joint venturers but had lost effective control over the mining operation 10 years ago due to an ongoing dispute with the other joint venturer. Nevertheless, the Mining Business was said to have continued to publicly assert 70% ownership of the joint venture and the Complainants argued that, even if there was a dispute, the company should have acted on human rights concerns about the mine. The ombudsperson characterized the Mining Business as having “deliberately avoided participating in and cooperating with the CORE’s dispute resolution process without providing any explanation” and agreed with the Complainants that serious issues had been raised that had not been adequately addressed by the Mining Business.</p> <h3><strong>The Investment Business investigation</strong></h3> <p>This allegation relates to the activities of an indirectly owned subsidiary of the Investment Business involved in the mining project that was the subject of the complaint. The Investment Business’ interest in the subsidiary was sold in July 2022. The Investment Business also provided substantive responses to the complaint, including submissions relating to certain employment practices of the subsidiary prior to the sale. </p> <p>The CORE declined to launch an investigation, but did provide recommendations to the Investment Business based on its mandate to advise Canadian companies on their practices and policies with regards to responsible business conduct. The CORE recommended that the Investment Business:</p> <ul> <li>Revise and update its policies on responsible exit or (if it does not have such policies) develop and adopt policies on responsible exit, including from high-risk areas, as part of its human rights due diligence;</li> <li>Share these policies with the CORE by December 29, 2023, and incorporate any feedback or comments from the CORE;</li> <li>Post the final policies on its website by March 15, 2024; and</li> <li>Publicly commit to implement and apply these policies in the context of its operations abroad.</li> </ul> <p>The CORE has stated that it will report publicly on the findings of its follow-up on the above.</p> <h3><strong>The Second Apparel Business investigation</strong></h3> <p>The initial assessment report states that the Second Apparel Business declined to attend an initial assessment meeting, but submitted responses in two emails which referred to policies and strategies. Upon receiving a draft of the initial assessment report, the Second Apparel Business provided further comments indicating that it had undertaken further investigations and expanding on measures taken. It also clearly stated that it was committed to cooperating with the CORE in good faith. </p> <p>The CORE agreed with the Complainants that there was a need for a limited investigation on specific points where, in the ombudsperson’s view, there was conflicting information. Given the Second Apparel Business’ willingness to cooperate in good faith, the CORE encouraged the parties to consider mediation as an option.</p> <h3>Early participation and clear indication of good faith cooperation could assist in early resolution</h3> <p>Of note, all four reports state that the Complainants were willing to participate in early resolution or mediation. However, in the cases of the First Apparel Business and the Mining Business the ombudsperson found that the companies were not willing to participate. The Apparel Business “did not confirm [its] intention to participate in mediation” when it was offered and the Mining Business simply stated it had no further comment. A clear indication from the Second Apparel Business of an intention to participate in good faith led to a recommendation for mediation.</p> <h3>Additional investigations announced</h3> <p>On August 24, 2023, <a rel="noopener noreferrer" target="_blank" href="https://core-ombuds.canada.ca/core_ombuds-ocre_ombuds/press-release_walmart-hugo-boss_diesel_communique.aspx?lang=eng">the CORE announced three additional investigations</a> with respect to companies in the apparel sector, in response to submissions from what appears to be the same group of Complainants. These cases were generally similar to the first four in that, while the Complainants’ allegations related only to imprecisely described indirect connections to forced labour, they met the CORE’s low threshold for proceeding. It should be noted that the CORE’s decisions in these cases appear to have been influenced by <span>what the CORE characterized as the</span> respondents’ reluctance to participate fully at each stage of the process and/or their failure to respond in sufficient detail (in the CORE’s view) to the Complainants’ allegations.</p> <h2>3. The Customs Tariff’s Import Prohibitions</h2> <p>Goods that are mined, manufactured or produced wholly or in part by forced labour, or goods manufactured or produced wholly or in part by prison labour, are currently prohibited from entering Canada pursuant to tariff item No. 9897.00.00 in the List of Tariff Provisions set out in the schedule to the <em>Customs Tariff.</em> As prohibited items, such goods cannot enter Canada and must therefore be abandoned, destroyed or re-exported by the importer.</p> <h3>Expanded definitions under the Act will mean more exclusions</h3> <p>The Act amends the <em>Customs Tariff</em> and also modifies the description of goods covered under tariff item <a rel="noopener noreferrer" target="_blank" href="https://www.cbsa-asfc.gc.ca/publications/dm-md/d9/d9-1-9-eng.pdf">No. 9897.00.00</a> by extending the existing prohibition on the importation of goods mined, manufactured or produced wholly or in part by forced labour so that it includes goods mined, manufactured or produced wholly or in part by child labour, whether coerced or not. Such amendments refer to the broad definitions of “forced labour” and “child labour” as provided for in section 2 of the Act.</p> <p>In practice, these broadened definitions will likely increase the risk of a violation for importers. For example, the new concept of “forced labour” may require less evidence of the involuntariness of the labour or service. Moreover, the definition of “child labour” in the Act should expand import prohibitions significantly when compared to the former definition of “forced labour”. Notably, the Act substantially supplements that definition by including labour or services provided by persons under the age of 18: under circumstances that are contrary to the laws applicable in Canada (where the labour or services are provided within Canada); and/or that interfere with schooling by depriving them of the opportunity to attend school, obliging them to leave school prematurely or requiring them to “combine school attendance with excessively long and heavy work”. </p> <p>The result of the above is that many goods that are not “mined, manufactured or produced wholly or in part by forced labour” under current legislation (and thus not subject to the import ban) could become subject to the import prohibition based on the new broadened definitions effective as of January 1, 2024.</p> <h3>Enforcement powers</h3> <p>To enforce the import ban, the Canada Border Services Agency (“CBSA”) has been granted significant powers such as: examination and detention of goods at the border, issuance of monetary penalties, seizure of goods, destruction or disposition of goods, application of ascertained forfeitures (i.e., imposition of monetary penalties when the goods cannot be seized), search of an entity's property, and criminal prosecution.</p> <p>In order to detain goods at the border, seize them, or take other enforcement actions, the CBSA must have reasonable grounds to believe that forced labour or child labour was involved in the production of the goods. Different elements can give rise to such suspicion, including, for example, information retrieved by the CBSA itself or by other government entities, warnings issued by foreign authorities, public reports, etc.</p> <p>Businesses may wish to reassess any contractual safeguards that they may have established to allocate these risks among the entities through which imported goods typically pass (importer, distributor, merchant, end user, etc.). In this respect, any entity named as “importer of record” on the Canada Customs Coding Form (Form B3) should be the first target of investigations and enforcement measures by the CBSA. It is worth noting that the CBSA may exercise its powers not only at the border, but also once the goods have been sold or passed on to other persons in Canada. In other words, the CBSA is authorized to enforce the import prohibition pursuant to the <em>Customs Act </em>post-importation. In essence, as the powers of the CBSA subsist even after the imported goods have changed hands, all businesses (irrespective of their size) that directly or indirectly deal with imported goods should make proper inquiries about their origins.</p> <p>Furthermore, it should be pointed out that the <em>Customs Act</em> specifically prohibits any person from possessing, purchasing, selling, exchanging or otherwise acquiring or disposing of any imported goods that are subject to an import ban. Therefore, this means that a Canadian retailer or end-user, for example, could also (in theory) face criminal charges just for selling or being in possession of goods subject to the import prohibition. Accordingly, all businesses dealing with imported goods (irrespective of their size) should take reasonable steps to ensure such goods are compliant with Canadian law. </p> <p>As the CBSA is the only federal department or agency in charge of enforcing the import prohibition, any business or end-consumer finding that they may be in possession of imported goods subject to the import prohibition should contact the CBSA’s Border Watch Tip Line. It is noteworthy that the acceptance of a voluntary disclosure by the CBSA does not necessarily preclude criminal prosecution. </p> <h2>4. Criminal Code Provisions</h2> <p>While the Act establishes reporting requirements, direct regulation of coercive exploitation of individuals (modern slavery) is left to the <a rel="noopener noreferrer" target="_blank" href="https://laws-lois.justice.gc.ca/eng/acts/c-46/page-41.html#h-120700"><em>Criminal Code</em></a>. Section 279.01 of the <em>Code</em>, “Trafficking in Persons”, establishes a sentencing range of 4 years to life imprisonment for anyone who transfers, holds, harbours (etc.) a person, or controls the person’s movements for the purpose of exploiting them or facilitating their exploitation (the most severe penalties apply where the exploitation involves a kidnapping or violent act). Since 2010, child labour has been dealt with by Section 279.011: where the person is a minor, the sentencing range is 5 years to life imprisonment (or 6 years to life, if a kidnapping or violent act occurs).</p> <p>“Exploitation” in this context is defined in Section 279.04 as causing a person to provide labour or a service by:</p> <p>“engaging in conduct that, in all the circumstances, could reasonably be expected to cause the other person to believe that their safety or the safety of a person known to them would be threatened if they failed to provide, or offer to provide, the labour or service.”</p> <p>The same words are used in the definition of “forced labour” in the Act. In determining whether exploitation has occurred, courts may consider factors such as the use of coercion (i.e., a threat or use of force) or deception by the accused and/or any abuse by the accused of a position of trust, power or authority (<em>Criminal Code</em>, s. 279.04(2)).</p> <p>Those who knowingly materially benefit from a breach of the trafficking provisions, whether directly or indirectly, can also face charges and up to 10 years incarceration or 14 in the case of the trafficking of a child.</p> <p>The above provisions apply extraterritorially to Canadian citizens and permanent residents. It appears that any conduct by a business within Canada, or material benefits derived from exploitation occurring in Canada, could create criminal liability under these sections. But so could conduct outside of Canada by a Canadian, or material benefits derived from such conduct.</p> <p><em>Criminal Code</em> provisions relating to extortion (s. 346(1)), kidnapping (s. 279(1)) and forcible confinement (s. 279(2)) could also be relevant in extreme situations, although there is no provision in the <em>Criminal Code</em> for applying them to conduct outside Canada.</p> <h2>5. Class Actions and Regulator Scrutiny</h2> <p>A recent British Columbia Court of Appeal <a rel="noopener noreferrer" target="_blank" href="https://www.canlii.org/en/bc/bcca/doc/2023/2023bcca264/2023bcca264.html?autocompleteStr=Hershey%20Company%20v%20Leaf&autocompletePos=1">class action certification ruling</a> raises a significant issue for companies making “modern slavery” statements under Bill S-211 or otherwise. The representative plaintiff in the proposed class action (the “Plaintiff”) argued that he and other members of the proposed class had been influenced to purchase grocery items associated with the two defendants (the “Defendants”), a U.S.-based candy manufacturer (the “Appellant”) and its Canadian subsidiary (the “Canadian Defendant”).</p> <p>This ruling concerned the Appellant’s claim that the B.C. court lacked jurisdiction over it due to the lack of a real and substantial connection between the Appellant and British Columbia. The Court of Appeal agreed and dismissed the class action as regards the Appellant (the Canadian Defendant did not dispute the B.C. court’s jurisdiction in this hearing). Thus this ruling did not attempt to resolve the negligent misrepresentation issues themselves, the existence of which nonetheless provides some food for thought.</p> <p>The Plaintiff’s notice of civil claim noted two publications of the Defendants:</p> <ul> <li>Their <strong>2014 Corporate Social Responsibility Report,</strong> in which it was stated: <ul> <li>that the Defendants were “actively involved in large-scale efforts that are committed to rooting out forced labour, especially forced labour” in their cocoa supply chain; and</li> <li>that they “have zero tolerance for the ‘worst forms of child labour’ in their supply chain” as defined under two different ILO conventions; and</li> </ul> </li> <li>Their <strong>Supplier Code of Conduct</strong>, which stated: <ul> <li>that the Defendants are “committed to the elimination of the ‘worst forms of child labor’;” and</li> <li>that certain forms of child labour are prohibited from their supply chain.</li> </ul> </li> </ul> <p>The Plaintiff then went on to assert that child labour and slavery are in fact “prevalent” in the Defendants’ supply chain in the developing world and that the impression to the contrary created by the documents referred to above is false and misleading to retail purchasers of Defendants’ chocolate products given that it is not corrected by any disclosures on the packaging.</p> <p>Overruling the trial judge, the Court of Appeal held that the Plaintiff had not provided sufficient evidence of the facts surrounding the alleged misrepresentations to allow a B.C. court to take jurisdiction over the Appellant. Nor had the Plaintiff shown that the Appellant carried on business in the province, a fact that might also, in theory, have grounded an assertion of jurisdiction even if the tort had occurred elsewhere.</p> <p>Nevertheless, the case against the Canadian Defendant is apparently proceeding. One takeaway from this is that, while it is natural to make optimistic and positive assertions in public statements, advertising or more formal types of disclosure, all such disclosure should be subject to proper diligence and support to avoid the risk of this type of exposure. Furthermore, while the viability of this type of negligent misrepresentation class action is not clear, there may be exposure under applicable Canadian securities laws that impose liability for both primary and secondary market disclosure, and risk of regulatory action. As the popularity of “ethical investing” creates real economic advantages for organizations with strong CSR records, supply chain transparency claims may come under the scrutiny of the Competition Bureau and securities regulators – much as has already happened with “greenwashing” controversies surrounding some corporate environmental claims (see our post on <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/competitor/highlights-from-the-competition-bureaus-green-growth-summit">the Competition Bureau’s “Green Growth” summit</a> and, with respect to securities regulators, <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2022-11/csa_20221103_51-364_continuous-disclosure-review.pdf">CSA Staff Notice 51-364 Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2022 and March 31, 2021</a>, at 9363-64).</p> <p><em>The authors would like to thank Ryan Albaum and David Kumar, summer students in the Toronto office of Stikeman Elliott LLP, for their contributions to this article.</em></p>06-Sep-2023 04:45:00{F0C60381-6B1B-4A07-8DB8-634ECC9522E8}https://www.stikeman.com/en-ca/kh/canadian-securities-law/sec-adopts-new-cybersecurity-disclosure-rules-us-public-companies-foreign-private-issuersStikeman ElliottCanadian Securities LawPrivacy & CybersecuritySEC Adopts New Cybersecurity Disclosure Rules for U.S. Public Companies and Foreign Private Issuers<p><strong>The Securities and Exchange Commission (“SEC”) adopted </strong><a rel="noopener noreferrer" target="_blank" href="https://www.sec.gov/files/rules/final/2023/33-11216.pdf"><strong>new rules requiring the disclosure of cybersecurity risk management, strategy, governance and material incidents</strong></a><strong> (the “Rules”), effective September 5, 2023. The Rules apply to U.S. domestic companies and foreign private issuers (“FPIs”). Canadian issuers reporting under the U.S.-Canada Multijurisdictional Disclosure System (“MJDS”) will be impacted to the extent that they are required to report material cybersecurity incidents in accordance with applicable Canadian rules.</strong></p> <h2>New Disclosure Requirements</h2> <p>Cybersecurity threats and incidents pose an ongoing and escalating risk to public companies. The SEC has indicated that it adopted the Rules to promote sound investment decision-making by providing investors with information in a consistent format that can be used to evaluate and compare issuers with respect to their exposure to material cybersecurity risks and incidents, as well as their ability to manage and mitigate them.</p> <h3>Incident reporting</h3> <p>The SEC defines a “cybersecurity incident” as an unauthorized occurrence on or conducted through a registrant’s information systems that jeopardizes the confidentiality, integrity or availability of a registrant’s information systems or any information residing therein. The Rules require U.S. domestic issuers to report cybersecurity incidents under a new Item 1.05 of Form 8-K within four business days of determining that an incident is material (rather than the date of the incident’s discovery). In determining whether an incident is material, issuers should apply the same materiality standard that generally applies under U.S. securities law – that is, whether there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision or whether it would significantly alter the total mix of information made available.</p> <p>The Form 8-K must describe the material aspects of the breach, including: (i) the nature, scope and timing of the incident; and (ii) the impact or reasonably likely impact on the company, including its financial condition and results of operations.</p> <p>A company may delay filing if the U.S. Attorney General determines that immediate disclosure would pose a substantial risk to national security or public safety.</p> <p>FPIs, including those eligible for the MJDS, must furnish, on Form 6-K, information on material cybersecurity incidents that they disclose in a foreign jurisdiction to any stock exchange or securityholder.</p> <p>Companies must begin complying with the new Form 8-K and 6-K requirements on December 18, 2023. Smaller reporting companies (i.e., companies that have: (i) a public float of less than US$250 million; or (ii) annual revenues of less than US$100 million and either no public float or a public float of less than US$700 million) do not need to comply until June 15, 2024.</p> <h3>Annual reporting requirements</h3> <p>The Rules also require enhanced disclosure of a company’s cybersecurity risk management and governance in annual reports on Forms 10-K and 20-F (but not on the Form 40-F that is available to MJDS issuers, as noted below). In particular, a company must describe:</p> <ul> <li>its processes, if any, for the assessment, identification and management of material risks from cybersecurity threats, including: (i) whether and how the cybersecurity processes have been integrated into the overall risk management system; (ii) whether the company engages assessors, consultants, auditors or other third parties in connection with such processes; and (iii) whether the company has processes to oversee and identify material risks from cybersecurity threats associated with its use of any third-party service provider;</li> <li>whether any risks from cybersecurity threats have materially affected or are reasonably likely to materially affect its business strategy, results of operations or financial condition;</li> <li>the board’s oversight of risks from cybersecurity threats, including: (i) identifying any board committee responsible for oversight; and (ii) describing the process by which the board or committee is informed of such risks; and</li> <li>management’s role in assessing and managing material risks from cybersecurity threats.</li> </ul> <p>Applicable companies must provide such disclosures beginning with annual reports for fiscal years ending on or after December 15, 2023.</p> <h2>Impact for Canadian Issuers</h2> <p>Canadian issuers eligible to use MJDS are permitted to use Canadian disclosure standards and documents to satisfy the SEC’s registration and disclosure requirements. As a result, the SEC did not adopt any changes to the annual reports required to be filed on Form 40-F by MJDS issuers, and Form 6-K was amended only to reference material cybersecurity incidents as an item that may trigger the form’s filing.</p> <p>Canadian and U.S. securities laws impose different requirements relating to the announcement of material cybersecurity incidents. Under Canadian securities laws, where a material change occurs in the affairs of a reporting issuer, the company is generally required to issue a news release forthwith disclosing the nature and substance of the change. The Toronto Stock Exchange requires a listed company to disclose material information concerning its business and affairs forthwith upon it becoming known to management. By contrast, the Rules provide that a U.S. domestic issuer must file Form 8-K within four business days of determining that a cybersecurity incident was material.</p> <p>While Canadian securities laws do not currently impose any specific cybersecurity disclosure requirements, in 2017, the Canadian Securities Administrators (“CSA”) published <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/pdfs/irps/20170119_51-347_disclosure-cyber-security.pdf">CSA Multilateral Staff Notice 51-347 <em>Disclosure of Cyber Security Risks and Incidents</em></a> (the “Notice”), which provides guidance on certain disclosure expectations, as we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/zh-cn/kh/canadian-securities-law/Expectations-for-Cyber-Security-Risk-Disclosure">previous post</a>. The Notice indicated that CSA Staff continue to monitor trends in cybersecurity disclosure and review the extent and timing of cybersecurity incident reporting. Given the increase in regulatory scrutiny and prevalence of cybersecurity attacks, the SEC’s adoption of the Rules may influence Canadian issuers’ disclosure practices going forward.</p> <p>Companies should therefore ensure that they have established cyber risk management programs that can identify and manage cybersecurity risks and respond to incidents quickly. Processes should be in place to communicate information promptly and to provide for cybersecurity expertise and training.</p> <p>The Rules apply independently of any data breach reporting obligations that may arise under Canada’s private-sector privacy laws, such as the <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-technology-ip-law/Federal-breach-notification-rules-finalized-in-force-November-2018">Federal</a> and <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-technology-ip-law/quebecs-proposed-confidentiality-incident-regulation">Quebec</a> laws.</p> <p>We continue to monitor these important developments.</p>06-Sep-2023 04:24:00{9F311B57-28D4-48B2-ACEC-EBF1B6F8C16C}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-and-ciro-publish-review-of-registrants-conflicts-of-interest-practicesStikeman ElliottCanadian Securities LawCSA and CIRO Publish Review of Registrants’ Conflicts of Interest Practices<p><strong>On August 3, 2023, the Canadian Securities Administrators (“CSA”) and the Canadian Investment Regulatory Organization (“CIRO,” and together with the CSA, the “Regulators”) published </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-08/csa_20230803_31-363_client-focused-reforms.pdf"><strong>Joint CSA and CIRO Staff Notice 31-363 <em>Client Focused Reforms: Review of Registrants’ Conflicts of Interest Practices and Additional Guidance</em></strong></a><strong> (the “Notice”). The Notice summarizes the Regulators’ findings and guidance, following their review of registered firms’ conflicts of interest practices. It also includes suggestions that the Regulators will consider when assessing registrants’ compliance in future reviews.</strong></p> <h2>Background</h2> <p>As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/client-focused-reforms-what-you-need-to-know">previous post</a>, <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/pdfs/irps/ni_20191003_31-103_reforms-enhance-client-registrant-relationship.pdf">amendments to National Instrument 31-103 <em>Registration Requirements, Exemptions and Ongoing Registrant Obligations</em></a> (“NI 31-103”) came into force in 2021 (the “Client Focused Reforms” or “CFRs”). The CFRs in part require that registrants take reasonable steps to identify existing and reasonably foreseeable material conflicts of interest and address those conflicts in the best interest of clients. If such conflicts cannot be addressed, they must be avoided. The conflicts of interest requirements are fundamental registrant obligations, and the CFRs outline how conflicts are expected to be identified, documented, addressed and disclosed.</p> <h2>Compliance Review</h2> <p>The Regulators reviewed 172 registered firms to: (i) assess compliance with the conflicts of interest requirements; (ii) broaden the Regulators’ understanding of and assess controls used to address conflicts; and (iii) develop a consistent compliance approach to reviewing conflicts of interest practices. In so doing, they identified the following common deficiencies:</p> <ul> <li>inadequate policies and procedures related to conflicts (66% of firms reviewed);</li> <li>missing or incomplete disclosure related to material conflicts (53% of firms reviewed);</li> <li>failure by registrants to identify one or more material conflicts (34% of firms reviewed);</li> <li>inadequate controls to address certain material conflicts in the best interest of clients (28% of firms reviewed);</li> <li>lack of or inadequate training on conflicts (17% of firms reviewed); and</li> <li>inadequate conflicts of interest recordkeeping (less than 10% of firms reviewed).</li> </ul> <p>The Regulators also observed that some firms were not familiar with the guidance in the Companion Policy to NI 31-103 and did not consider the examples of conflicts or controls provided therein. These firms in turn failed to identify certain conflicts, assess them as material and/or implement sufficient controls.</p> <p>While the Notice should be reviewed for more information, we summarize certain aspects of the Regulators’ findings and guidance below.</p> <h3>Inadequate policies and procedures</h3> <p>Most of the firms reviewed had inadequate written policies and procedures on conflicts of interest. Of these firms, some had policies and procedures but had not updated them sufficiently to comply with the requirements introduced by the CFRs.</p> <p>The Regulators note that a firm’s policies and procedures on conflicts of interest should include:</p> <ul> <li>a definition of “conflicts of interest” that enables the firm and individuals acting on its behalf to understand and identify conflicts that may arise;</li> <li>a clear delineation of the firm’s and registered individuals’ responsibilities with respect to identifying and addressing material conflicts;</li> <li>the process for registered individuals to report or escalate conflicts;</li> <li>the process and criteria used by the firm to determine the materiality of conflicts;</li> <li>guidance on how material conflicts will be addressed;</li> <li>the controls the firm has in place to address material conflicts and how those controls will be tested;</li> <li>the process for training employees with respect to conflicts;</li> <li>the process for regular reporting on conflicts by the chief compliance officer to the firm’s management and others;</li> <li>the content of and process and timing for preparing and delivering conflicts of interest disclosure to clients;</li> <li>the process for periodic review of the firm’s inventory of conflicts and conflicts of interest disclosure for clients; and</li> <li>the content and process for recordkeeping related to conflicts.</li> </ul> <h3>Missing or incomplete disclosure</h3> <p>Approximately 10% of the firms reviewed did not provide any disclosure to clients regarding material conflicts of interest identified, and in the case of approximately 43% of firms, incomplete disclosure was provided. Inadequate disclosure was identified in respect of: (i) internal compensation and incentives; (ii) compensation from clients; (iii) third-party compensation; (iv) outside activities; (v) distribution of proprietary products; (vi) referral arrangements; (vii) related or connected issuers; and (viii) leverage recommendations.</p> <p>In the Notice, the Regulators emphasize the disclosure requirements introduced by the CFRs and the need for registrants to address all of the required elements. They also provide specific guidance regarding the format and timing of disclosure as well as disclosure prepared by another entity.</p> <h3>Failure to identify and inadequate controls to address material conflicts</h3> <p>Some of the firms reviewed did not identify certain conflicts of interest, assess them as material and/or implement controls sufficient to address them in the best interest of clients.</p> <p>In addition to general guidance, the Regulators provide specific examples of and suggested controls for conflicts that were either not identified as material or adequately addressed. These include conflicts arising from: (i) internal compensation arrangements and incentive practices; (ii) third-party compensation; (iii) proprietary products; (iv) fees charged to clients; (v) supervisory compensation; (vi) director positions with issuers; (vii) referral arrangements; (viii) trades alongside clients (i.e., exempt market dealer relationships); (ix) gifts or entertainment; and (x) managing and distributing prospectus-exempt proprietary issuers.</p> <h3>Lack of or inadequate training</h3> <p>While most of the firms reviewed provided adequate training on conflicts of interest, the Regulators determined that training was inadequate when: (i) it was too generic and not specific to the firm’s business operations or size; (ii) it did not provide descriptions or examples of the firm’s existing material conflicts; (iii) all individuals who should have been included in the training were not included; and (iv) it did not mention or provide details of the firm’s reporting or escalation process for when a material conflict is identified.</p> <p>Some firms provided training but did not maintain adequate records to evidence that such training was provided. The Regulators encourage firms to demonstrate compliance by maintaining documentation such as copies of training modules or content, attendance logs and details of how employees who missed scheduled training were trained thereafter.</p> <h3>Inadequate recordkeeping</h3> <p>While most of the firms reviewed were compliant insofar as recordkeeping is concerned, the Regulators note that the CFRs introduced additional recordkeeping requirements specific to conflicts of interest. With sufficient detail, firms must document their identification, review and analysis of conflicts, determinations in respect of materiality and controls used to address material conflicts.</p> <p>Apart from offering general guidance, the Regulators suggest that firms create a conflicts inventory and maintain evidence of periodic reviews of such inventory and the controls associated with each material conflict.</p> <h2>What’s Next?</h2> <p>The Regulators continue to review and evaluate registrants’ compliance with securities legislation, including the other requirements introduced by the CFRs. Over the course of this year, in particular, they will assess compliance with the know-your-client, know-your-product and suitability determination requirements. The Regulators caution that additional rules will be considered if they do not observe the results they expected from the CFRs, including the conflicts of interest provisions.</p>24-Aug-2023 06:27:00{EF27FAE1-0E6B-48C6-9D1B-63DEF42FC74F}https://www.stikeman.com/en-ca/kh/canadian-securities-law/alternative-investment-funds-an-overview-for-2023Darin R. Rentonhttps://www.stikeman.com/en-ca/people/r/darin-r-rentonJill Wintonhttps://www.stikeman.com/en-ca/people/w/jill-wintonAmy Chaohttps://www.stikeman.com/en-ca/people/c/amy-chaoIrena Ninkovichttps://www.stikeman.com/en-ca/people/n/irena-ninkovicCanadian Securities LawAlternative Investment Funds: An Overview for 2023<p>Four of our lawyers from Toronto and Montréal recently updated <a href="/-/media/files/kh-general/iclg-alternative-investment-funds-2023---stikeman-elliott.ashx">the “Canada” chapter</a> of <em>Alternative Investment Funds 2023,</em> published by International Comparative Legal Guides. This chapter provides practical cross-border insights into alternative investment funds work, focusing on the following topics:</p> <ul> <li>Regulatory Framework</li> <li>Fund Structures</li> <li>Marketing</li> <li>Investments</li> <li>Disclosure of Information</li> <li>Taxation</li> <li>Trends and Reforms</li> </ul> <p>We are pleased to provide a downloadable version of <a href="/-/media/files/kh-general/iclg-alternative-investment-funds-2023---stikeman-elliott.ashx">our 13-page publication</a>.</p>17-Aug-2023 02:58:00{70ABF624-8DAC-49EF-A86B-3552F3A884FE}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-proposes-permanent-exemption-for-federal-financial-institutions-from-non-gaap-disclosureStikeman ElliottCanadian Securities LawOSC Proposes Permanent Exemption for Federal Financial Institutions from Certain Non-GAAP Disclosure Requirements<p><strong>The Ontario Securities Commission (“OSC”) recently announced proposed </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/en/securities-law/instruments-rules-policies/5/52-503/notice-commission-approval-osc-rule-52-503-exemption-disclosure-specified-financial-measure"><strong>OSC Rule 52-503 <em>Exemption from Disclosure of a Specified Financial Measure</em></strong></a><strong> (the “Rule”). If approved by the Minister of Finance (the “Minister”), the Rule will provide an exemption in Ontario from certain requirements in National Instrument 52-112 <em>Non-GAAP and Other Financial Measures Disclosure</em> (“NI 52-112”) for a reporting issuer that is, or that has a subsidiary or an affiliate that is, a “federal financial institution” as defined in the <em>Bank Act</em> (Canada) and subject to the guidelines of the Office of the Superintendent of Financial Institutions of the Government of Canada (“OSFI Guidelines”).</strong></p> <h2>The Rule</h2> <p>The Rule is intended to make permanent the temporary exemption set out in the blanket order issued in December 2021, <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/en/securities-law/instruments-rules-policies/5/52-502/ontario-instrument-52-502-exemption-national-instrument-52-112-non-gaap-and-other-financial">Ontario Instrument 52-502 <em>Exemption from National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure (Interim Class Order)</em></a> (the “Order”), which expired on June 2, 2023.</p> <p>As <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-adopt-disclosure-requirements-for-non-gaap-financial-measures">discussed previously</a>, NI 52-112 requires reporting issuers that include non-GAAP and certain other financial measures in public disclosure to provide additional information to help investors understand the context of such measures. The <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-issues-order-to-provide-exemption-to-federal-financial-institutions-from-non-gaap-disclosure-requirements">Order provided an exemption</a> to eligible issuers from NI 52-112 in respect of disclosure of a specified financial measure pursuant to an OSFI Guideline, where: (i) the OSFI Guideline specified the composition of the measure, and the measure was determined in compliance with that OSFI Guideline; and (ii) in proximity to the measure, the eligible issuer disclosed the OSFI Guideline under which the measure was disclosed.</p> <p>The Rule is intended to reduce regulatory burden for eligible issuers that are subject to OSFI Guidelines since sufficient disclosure exists surrounding these measures. Although NI 52-112 contains an exception in respect of disclosure of a specified financial measure that is required under law, such exception does not apply to the OSFI Guidelines because they are not law.</p> <h2>What’s Next?</h2> <p>The OSC has delivered the Rule to the Minister, who may approve, reject or return it for further consideration. If the Minister approves the Rule or does not take any further action, the Rule will come into force on October 3, 2023.</p>09-Aug-2023 07:16:00{8F29739B-1569-4303-99E0-26F2DEF6A3D6}https://www.stikeman.com/en-ca/kh/canadian-product-liability-law/csa-welcome-release-by-issb-of-global-sustainability-disclosure-standardsRamandeep K. Grewalhttps://www.stikeman.com/en-ca/people/g/ramandeep-k-grewalCanadian Securities LawCSA Welcome Release by ISSB of Global Sustainability Disclosure Standards<p><strong>On June 26, 2023, the International Sustainability Standards Board (“ISSB”) released its first two sustainability disclosure standards (the “ISSB Standards”), </strong><a rel="noopener noreferrer" target="_blank" href="https://www.ifrs.org/projects/completed-projects/2023/general-sustainability-related-disclosures/#published-documents"><strong>IFRS S1 <em>General Requirements for Disclosure of Sustainability-related Financial Information</em></strong></a><strong> (“IFRS S1”) and </strong><a rel="noopener noreferrer" target="_blank" href="https://www.ifrs.org/projects/completed-projects/2023/climate-related-disclosures/#published-documents"><strong>IFRS S2 <em>Climate-related Disclosures</em></strong></a><strong> (“IFRS S2”). The Canadian Sustainability Standards Board (“CSSB</strong><strong>”) will work with the ISSB to support the uptake of the ISSB Standards in Canada, while the Canadian Securities Administrators (“CSA”) also conduct further consultations to determine the appropriate adoption framework for Canadian reporting issuers, modified as necessary for the Canadian context.</strong></p> <h2>Background</h2> <p>The ISSB was formed in November 2021 by the International Financial Reporting Standards Foundation to develop a comprehensive global baseline of sustainability disclosure standards to meet investors’ information needs. The ISSB published drafts of the ISSB Standards for public review in March 2022 and received over 1,400 comment letters. Following an extensive consultation process, <a rel="noopener noreferrer" target="_blank" href="https://www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/">final versions of the ISSB Standards were released</a> on June 26, 2023.</p> <p>The ISSB Standards require entities to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect an entity’s cash flows, access to finance or cost of capital over the short, medium or long term.</p> <h2>Adoption in Canada</h2> <p>The adoption of the ISSB Standards is voluntary, and it is up to the various global regulators to determine whether their jurisdiction will mandate them. To the extent that they are adopted in their current form, the ISSB Standards apply to annual reporting periods beginning on or after January 1, 2024. Therefore, the first reports to address the ISSB Standards will likely be published in 2025, although earlier application is permitted.</p> <p>While Canadian entities are not currently required to comply with the ISSB Standards, there has been broad support in Canada and globally for the development and adoption of consistent and comparable sustainability disclosure requirements.</p> <p>The <a rel="noopener noreferrer" target="_blank" href="https://www.frascanada.ca/en/cssb/about">CSSB will work with the ISSB</a> to support the uptake of the ISSB Standards in Canada and facilitate the interoperability between the ISSB Standards and any forthcoming CSSB standards and rules adopted by Canadian securities regulators.</p> <p>On July 5, 2023, the CSA announced that they welcome the publication of the ISSB Standards and commend the ISSB for developing a global framework for investor-focused disclosure that is responsive to market demand for more consistent and comparable disclosures. The CSA also noted that they welcome the June 26 announcement by the CSSB that it is now operational and look forward to engaging and collaborating with the CSSB with respect to the ISSB Standards.</p> <h2>ISSB Standards</h2> <p>The ISSB Standards are designed to ensure that entities provide sustainability-related information alongside financial statements in the same reporting package and for the same reporting period. Entities are also required to disclose comparative information in respect of a prior period for all amounts disclosed.</p> <h3>IFRS S1</h3> <p>IFRS S1 requires disclosure of all material sustainability-related risks and opportunities. More specifically, disclosure is required in respect of:</p> <ul> <li><strong>governance</strong>: the governance processes, controls and procedures an entity uses to monitor and manage sustainability-related risks and opportunities;</li> <li><strong>strategy</strong>: the approach an entity uses to manage sustainability-related risks and opportunities;</li> <li><strong>risk management</strong>: the processes an entity uses to identify, assess, prioritize and monitor sustainability-related risks and opportunities; and</li> <li><strong>metrics and targets</strong>: an entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.</li> </ul> <h3>IFRS S2</h3> <p>IFRS S2 requires disclosure of climate-related risks and opportunities that could reasonably be expected to affect an entity’s prospects while building on the more general requirements in IFRS S1. Climate-related risks include both physical risks (i.e., risks that arise from weather-related events such as storms, floods or droughts) and transition risks (i.e., policy, legal, technological, market or reputational risks that arise from efforts to transition to a lower-carbon economy).</p> <p>In addition to prescribed information on governance, strategy and risk management, entities are required to disclose the following metrics and targets:</p> <ul> <li>absolute greenhouse gas (“GHG”) emissions, including Scope 1, Scope 2 and Scope 3 GHG emissions;</li> <li>the amount and percentage of assets or business activities that are: (i) vulnerable to climate-related transition risks; (ii) vulnerable to climate-related physical risks; and (iii) aligned with climate-related opportunities;</li> <li>the amount of capital expenditures, financing or investment deployed towards climate-related risks and opportunities;</li> <li>the price for each metric tonne of GHG emissions an entity uses to assess the costs of its GHG emissions and how the entity is applying a carbon price in its decision making;</li> <li>the percentage of executive management remuneration recognized in the current period that is linked to climate-related considerations and how those considerations are factored into executive remuneration; and</li> <li>comprehensive information on all quantitative and qualitative climate-related targets an entity has set and any targets it is required to meet by law or regulation.</li> </ul> <h2>Transition Relief</h2> <p>In the first annual reporting period in which the ISSB Standards apply, transition relief will be provided from certain disclosure requirements, including in respect of disclosure of metrics and targets under IFRS S2. An entity has the option to limit disclosure and report only on climate-related risks and opportunities (in accordance with IFRS S2) and to apply the requirements in IFRS S1 only to the extent that they relate to climate-related risks and opportunities. If an entity relies on such transition relief, it must disclose that fact.</p> <p>Entities are also permitted to: (i) continue using a measurement other than the Greenhouse Gas Protocol 2004 to measure GHG emissions if they were using that other method in the prior period; and (ii) not disclose Scope 3 GHG emissions in the first year that the ISSB Standards apply.</p> <p>Entities are also not required to disclose comparative information or make sustainability-related financial disclosures at the same time as they publish their financial statements in the first annual reporting period.</p> <h2>What’s Next?</h2> <p>The ISSB intends to form a Transition Implementation Group (the “TIG”) to support the implementation of the ISSB Standards. The TIG will:</p> <ul> <li>provide a public forum for the discussion of implementation questions; and</li> <li>inform the ISSB to determine what, if any, action will be needed to address those questions.</li> </ul> <p>As noted above, timing and scope of implementation will continue to be considered by the CSSB for Canada.</p> <p>In 2021, the <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/climate-related-disclosure-requirements-proposed-by-the-csa">CSA published their own consultation</a> under <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2021-10/csa_20211018_51-107_disclosure-update.pdf">CSA Notice and Request for Comment Proposed National Instrument 51-107 <em>Disclosure of Climate-related Matters</em></a>, which was put on hold in 2022, with the <a rel="noopener noreferrer" target="_blank" href="https://www.securities-administrators.ca/news/canadian-securities-regulators-consider-impact-of-international-developments-on-proposed-climate-related-disclosure-rule/">CSA noting</a> that they will need to reconsider their approach in light of the ISSB proposals.</p> <p>On July 25, 2023, the <a rel="noopener noreferrer" target="_blank" href="https://www.iosco.org/news/pdf/IOSCONEWS703.pdf">International Organization of Securities Commissions endorsed the ISSB Standards</a> and called on its member jurisdictions to consider ways in which they might adopt or apply the ISSB Standards within the context of their jurisdictional arrangements.</p>02-Aug-2023 08:12:00{844984FA-149A-41F0-AB7A-1A246B0E9D00}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-announce-temporary-sedar-filing-exemption-for-foreign-issuer-private-placementsStikeman ElliottCanadian Securities LawCSA Announce Temporary SEDAR+ Filing Exemption for Foreign Issuer Private Placements<p><strong>On July 20, 2023, the Canadian Securities Administrators (“CSA”) announced a </strong><a rel="noopener noreferrer" target="_blank" href="https://www.bcsc.bc.ca/-/media/PWS/New-Resources/Securities-Law/Instruments-and-Policies/Policy-1/13933-CSA-Notice-July-20-2023.pdf?dt=20230718200832"><strong> temporary exemption</strong></a><strong> (the “Exemption”) from the requirements to transmit a Form 45-106F1 <em>Report of Exempt Distribution</em> (“Report of Exempt Distribution”) and offering memorandum through the System for Electronic Data Analysis and Retrieval + (“SEDAR+”) in connection with distributions of eligible foreign securities to permitted clients. The Exemption will allow the CSA to consider potential enhancements to the functionality of SEDAR+.</strong></p> <h2>Description of the Blanket Order</h2> <p>Each member of the CSA has implemented the relief through a local blanket order referred to as “Coordinated Blanket Order 13-933 <em>Temporary exemption from the requirement to transmit a report of exempt distribution through SEDAR+ in connection with distributions of eligible foreign securities to permitted clients</em>” (collectively, the “Blanket Order”). An issuer that relies on the Exemption must file its Report of Exempt Distribution and offering memorandum, if applicable, in each jurisdiction where the distribution occurred in the manner set out in the Blanket Order. Filings in Ontario will be made through the Ontario Securities Commission’s electronic filing portal, while filings in all other jurisdictions will be by email.</p> <p>The Blanket Order does not relieve an issuer from any of the reporting requirements in Part 6 of National Instrument 45-106 <em>Prospectus Exemptions</em> or the filing fees or any late fees in respect of the Report of Exempt Distribution. The Exemption relates solely to the method of filing.</p> <p>Reports of Exempt Distribution filed in reliance on the Blanket Order will be publicly available on request made to the appropriate CSA members.</p> <h2>Who May Rely on the Exemption?</h2> <p>The Exemption is only available in connection with distributions of eligible foreign securities to permitted clients.</p> <p>An “eligible foreign security” means a security offered primarily in a foreign jurisdiction as part of a distribution of securities in either of the following circumstances:</p> <ul> <li>the security is issued by an issuer that: <ul> <li>is incorporated, formed or created under the laws of a foreign jurisdiction;</li> <li>is not a reporting issuer in a jurisdiction of Canada;</li> <li>has its head office outside of Canada; and</li> <li>has a majority of its executive officers and a majority of its directors ordinarily resident outside of Canada; or</li> </ul> </li> <li>the security is issued or guaranteed by the government of a foreign jurisdiction.</li> </ul> <p>A “permitted client” has the meaning given to it in National Instrument 31-103 <em>Registration Requirements, Exemptions and Ongoing Registrant Obligations</em>.</p> <h2>Term of the Blanket Order</h2> <p>The Blanket Order came into effect on July 21, 2023. In certain jurisdictions, the Blanket Order includes an expiry date based on the term limits for blanket orders in the local jurisdiction. For example, in Ontario, the Blanket Order will expire on January 21, 2025. The CSA expect that the Blanket Order will be revoked or replaced before the expiry date and will provide notice before taking such action.</p>26-Jul-2023 08:59:00{42906BB4-F8C2-4C4C-B80E-875F20E6C399}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-publishes-considerations-for-public-accounting-firmsStikeman ElliottCanadian Securities LawOSC Publishes Considerations for Public Accounting Firms in Developing Internal Ethics Policies and Procedures<p><strong>The Ontario Securities Commission (“OSC”) recently published </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-06/sn_20230628_52-724_auditor-ethics.pdf"><strong>OSC Staff Notice 52-724 <em>Considerations for Public Accounting Firms in Developing Internal Ethics Policies and Procedures</em></strong></a><strong> (the “Notice”). The Notice summarizes observations of OSC Staff, following inquiries they made in response to ethical violations that had been identified by regulators in Canada and other jurisdictions. The Notice also outlines recommendations, but does not create any new requirements, for public accounting firms.</strong></p> <h2>Purpose and Scope of Inquiry</h2> <p>Last year, the OSC announced that it would be making targeted inquiries to certain public accounting firms that audit Ontario reporting issuers, in light of ethical violations identified by the Canadian Public Accountability Board and regulators in other jurisdictions. As actual or perceived issues with the ethical integrity of auditors may undermine investor confidence in financial reporting, OSC Staff aimed to assess how public accounting firms: (i) communicate the need for strong ethical behaviour to invoke a culture of internal compliance; and (ii) assess compliance with ethical requirements as part of their internal policies and procedures.</p> <h2>Observations and Recommendations</h2> <p>In the Notice, OSC Staff provide views on three areas of focus: (i) internal ethics policies and procedures; (ii) the dating of audit work performed; and (iii) internal professional training programs.</p> <h3>Internal ethics policies and procedures</h3> <p>While each of the firms with which the OSC engaged had a collection of internal ethics policies and procedures, supported by a Code of Conduct, which were accessible and required to be reviewed periodically by employees, OSC Staff identified a few additional items for consideration by public accounting firms to assess whether their existing policies and procedures are sufficiently robust. These include the:</p> <ul> <li>development of an overarching ethics strategy to support the development and maintenance of a strong ethical culture and which includes: (i) ethics education training and guidance; (ii) processes to monitor and assess the need for updates to policies or guidance; and (iii) opportunities for employee feedback;</li> <li>identification of a leader responsible for implementing the ethics strategy; and</li> <li>establishment of a robust internal whistleblower program.</li> </ul> <h3>Dating of audit work performed</h3> <p>OSC Staff noted that firms generally relied on electronic software to prepare and evidence sign-off of audit working papers. To mitigate the risk of employees adding significant documentation to a file after the corresponding auditor’s report has been approved and dated, OSC Staff suggest that public accounting firms:</p> <ul> <li>continuously evaluate their electronic software controls to prevent backdating;</li> <li>develop processes and controls to assess administrative documentation added following the date of the auditor’s report; and</li> <li>implement a centralized mechanism for the timely archiving of audit files and maintenance of final versions.</li> </ul> <h3>Internal professional training programs</h3> <p>OSC Staff observed that accounting firms primarily used systems-based platforms to deliver and monitor completion of mandatory training, including testing. They also relied mainly on internal whistleblower programs to detect violations of the requirement that training be completed independently. In this respect, OSC Staff recommend that public accounting firms:</p> <ul> <li>implement preventative controls to minimize the risk of answers to training module assessments being shared;</li> <li>implement appropriate detection level controls, distinct from reliance on internal whistleblower programs; and</li> <li>communicate violations and consequences appropriately.</li> </ul> <h2>Implementation</h2> <p>OSC Staff strongly encourage public accounting firms to review and apply the recommendations in the Notice to develop appropriate ethical policies and procedures. The suggested areas of focus may be tailored to different types and sizes of public accounting firms and are not meant to imply that “one size fits all.”</p> <p>Finally, while the Notice does not introduce any new professional or regulatory requirements, OSC Staff note that they continue to monitor this area and will consider further measures if additional or ongoing concerns are identified in the future.</p>26-Jul-2023 07:11:00{7E3F4C6E-7F0A-4D96-8A8E-3B9FCCC8A5E4}https://www.stikeman.com/en-ca/kh/canadian-securities-law/osc-and-amf-request-comment-on-application-for-designated-interest-rate-benchmarkStikeman ElliottCanadian Securities LawOSC and AMF Request Comment on Application for Designated Interest Rate Benchmark and Designated Benchmark Administrator<p><strong>The Ontario Securities Commission and the Autorité des marchés financiers (the “Regulators”) recently received an </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-07/20230706_osc-amf-designated-benchmark-administrator.pdf"><strong>application (the “Application”) from CanDeal Benchmark Administration Services Inc.</strong></a><strong> (“CBAS”) to have Term CORRA designated as a designated interest rate benchmark and CBAS designated as its designated benchmark administrator. The Regulators are accepting public comments on the Application until August 8, 2023.</strong></p> <h2>What is Term CORRA?</h2> <p>On June 28, 2024, the Canadian Dollar Offered Rate (“CDOR”), a designated interest rate benchmark, will cease to be published. It is anticipated that market participants will use the Canadian Overnight Repo Rate Average (“CORRA”) as the alternative reference rate for most instruments that currently reference CDOR. CORRA is an existing interest rate benchmark, administered by the Bank of Canada.</p> <p>By contrast, Term CORRA is a new interest rate benchmark, administered by CBAS, that is intended to replace CDOR for certain instruments or, when appropriate, for related derivatives. Term CORRA will be a forward-looking measurement of CORRA for 1- and 3-month tenors, based on market-implied expectations from CORRA derivatives markets. Its use will be limited through licensing agreements to trade finance, loans and derivatives associated with loans. As such, it is expected that Term CORRA will be important for the successful transition of the Canadian loan and trade finance market from CDOR.</p> <h2>The Designation Process</h2> <p>As we discussed in a <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-introduce-rules-to-regulate-financial-benchmarks-and-administrators">previous post</a>, under Multilateral Instrument 25-102 <em>Designated Benchmarks and Benchmark Administrators </em>(“MI 25-102”), regulators may designate and regulate financial benchmarks, their administrators, contributors and certain users. CBAS has applied to the Regulators on this basis and intends to launch Term CORRA for use by market participants in September 2023. It is worth noting that since the regime under MI 25-102 is one of designation, rather than registration or licensing, Term CORRA and CBAS need not be designated prior to launch.</p> <p>While the Regulators believe that the Application should be accepted, they welcome public comments until August 8, 2023.</p>21-Jul-2023 09:01:00{30A690C1-4557-4775-96EC-3BFCD1271B89}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-adopt-regulatory-regime-for-commodity-benchmarks-and-their-administratorsStikeman ElliottCanadian Securities LawCSA Adopt Regulatory Regime for Commodity Benchmarks and Their Administrators<p><strong>The Canadian Securities Administrators (“CSA”) recently announced that the securities regulatory authorities in Alberta, British Columbia, New Brunswick, Northwest Territories, Nova Scotia, Ontario, Québec, Saskatchewan and Yukon are adopting </strong><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-06/csa_20230629_25-102_amendments.pdf"><strong>amendments (the "Amendments") to Multilateral Instrument 25-102<em> Designated Benchmarks and Benchmark Administrators</em></strong></a><strong> (“MI 25-102”) to introduce a regulatory regime in respect of commodity benchmarks and their administrators.</strong></p> <p>As we discussed in a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-introduce-rules-to-regulate-financial-benchmarks-and-administrators">previous post</a>, MI 25-102 became effective in July 2021 to permit regulators to designate and regulate financial benchmarks and their administrators as well as to regulate contributors and certain benchmark users. At that time, the CSA had also proposed the Amendments, which would implement a comprehensive regime for the designation and regulation of commodity benchmarks and the persons or companies who administer them. The CSA continue to be of the view that adopting the Amendments will codify international best practices.</p> <p>A benchmark is a price, estimate, rate, index or value that is:</p> <ul> <li>determined, from time to time, by reference to an assessment of one or more underlying interests;</li> <li>made available to the public, either free of charge or on payment; and</li> <li>used for reference for any purpose, including: <ul> <li>determining the interest payable, or other sums that are due, under a contract, derivative, instrument or security;</li> <li>determining the value of a contract, derivative, instrument or security or the price at which it may be traded;</li> <li>measuring the performance of a contract, derivative, investment fund, instrument or security; or</li> <li>any other use by an investment fund.</li> </ul> </li> </ul> <p>Under the Amendments, a “designated commodity benchmark” means a benchmark that is:</p> <ul> <li>determined by reference to or an assessment of an underlying interest that is a commodity other than a currency; and</li> <li>designated for the purposes of the instrument as a “commodity benchmark” by a decision of the securities regulatory authority.</li> </ul> <p>According to the CSA, while regulators do not currently intend to designate any administrators of commodity benchmarks, they may do so in the future on public interest grounds, including where a commodity benchmark is sufficiently important to commodity markets in Canada or where regulators become aware of activities that raise concerns that align with certain regulatory risks.</p> <p>Subject to obtaining necessary ministerial approvals, the Amendments will come into force on September 27, 2023.</p>13-Jul-2023 04:02:00{367F3556-9638-48E6-9C04-4492E1F1D4CC}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-propose-to-eliminate-exception-reporting-requirement-and-extend-moratoriumStikeman ElliottCanadian Securities LawCSA Propose to Eliminate Exception Reporting Requirement and Extend Moratorium<p><strong>On June 15, 2023, the Canadian Securities Administrators (“CSA”) announced the extension of relief from the exception reporting requirement (“Exception Reporting Requirement”) in National Instrument 24-101 <em>Institutional Trade Matching and Settlement </em>(“NI 24-101”) for registered dealers and advisers. The extension aligns with ongoing initiatives to shift the Canadian investment industry’s settlement cycle to one day after the date of a trade (“T+1”).</strong></p> <p>Effective July 2, 2023, the CSA extended relief from the Exception Reporting Requirement (the “2023 Moratorium”). The <a rel="noopener noreferrer" target="_blank" href="https://stikeman.com/en-ca/kh/canadian-securities-law/OSC-Introduces-Three-Year-Moratorium-on-Trade-Matching-Exception-Reporting">previous, three-year moratorium</a> expired on July 1, 2023.</p> <p>The 2023 Moratorium is expected to expire with the coming into force of <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2022-12/ni_20221215_24-101_rfc_trade-matching-settlement.pdf">proposed amendments to NI 24-101</a> (the “Proposed Amendments”), published last December, which would permanently eliminate the Exception Reporting Requirement. The Proposed Amendments are intended to support the shortening of Canada’s standard settlement cycle for equity and long-term debt market trades from two days after the date of a trade (“T+2”) to T+1. Such changes would harmonize Canada’s settlement cycle with that of the U.S., where <a rel="noopener noreferrer" target="_blank" href="https://www.sec.gov/news/press-release/2023-29">new Securities and Exchange Commission rules</a> will shorten the settlement cycle to T+1 by May 28, 2024. If approved, the Proposed Amendments will likely come into force on a date that corresponds with Canada’s transition to T+1, currently expected to be May 27, 2024.</p> <p>The 2023 Moratorium is the most recent of several developments to facilitate Canada’s transition to T+1. This spring, the Canadian Investment Regulatory Organization (“CIRO”) (formerly, the New Self-Regulatory Organization of Canada) <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-04/newsro_20230420_notice.pdf">proposed related amendments to the Universal Market Integrity Rules and the Investment Dealer and Partially Consolidated Rules</a>. Along with the Proposed Amendments, the CSA had also published, last December, a <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2022-12/csa_20221215_81-335_investment-fund-settlement-cycles.pdf">staff notice in which they did not propose amending National Instrument 81-102 <em>Investment Funds</em></a> to shorten the settlement cycle for mutual funds, but instead suggested that funds settle on T+1 voluntarily.</p> <p>Alternatively, if the Proposed Amendments do not come into force within the next 18 months (i.e., by January 2, 2025), the 2023 Moratorium will expire, unless extended further.</p> <p>We continue to monitor these important developments and will keep our clients and readers apprised as they unfold. For more information, please review <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-06/csa_20230615_24-930.pdf">CSA Notice Regarding Coordinated Blanket Order 24-930 <em>Exemption from Certain Filing Requirements of National Instrument 24-101 Institutional Trade Matching and Settlement</em></a>.</p>07-Jul-2023 08:21:00{4CAB0CDA-6F47-47A6-875B-2ACB20679F6F}https://www.stikeman.com/en-ca/kh/canadian-securities-law/sunny-days-new-sr-officially-named-canadian-investment-regulatory-organizationStikeman ElliottCanadian Securities LawSunny Days: New SRO Officially Named “Canadian Investment Regulatory Organization”<p><strong>The New Self-Regulatory Organization of Canada (“New SRO”) changed its name to “Canadian Investment Regulatory Organization” (“CIRO”) on June 1, 2023.</strong></p> <p>The former Investment Industry Regulatory Organization of Canada (“IIROC”) and the former Mutual Fund Dealers Association (“MFDA”) were amalgamated on January 1, 2023, and temporarily named “New SRO” until a permanent name was chosen. The permanent name change of “New SRO” to “CIRO” was effected on June 1, 2023, under <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-06/ciro_20230601_notice-commission-approval.pdf">housekeeping amendments</a>. The name change was further reflected in various recognition orders and an order designating CIRO as the information processor for unlisted debt securities that also took effect on June 1, 2023.</p> <p>“Ciro” is the Italian, and also Spanish, version of the name “Cyrus” and means “sun.”</p> <h2>Oversight of CIRO</h2> <p>Concurrent with the name change amendments, a <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-06/ciro_20230601_mou.pdf">memorandum of understanding</a> (“MOU”) among the recognizing regulators regarding the oversight of CIRO was published, replacing the MOU that took effect on January 1, 2023. The recognizing regulators comprise the securities regulators in each province and territory of Canada.</p> <p>The parties to the MOU developed an oversight program, which includes:</p> <ul> <li>the review of information filed by CIRO;</li> <li>a non-objection process;</li> <li>procedures for performing periodic oversight reviews; and</li> <li>a joint rule review protocol for coordinating the review and approval of, or non-objection to, CIRO’s by-laws and rules.</li> </ul> <p>The MOU also outlines the guiding principles for the regulators’ joint oversight activities, which consist of providing harmonious direction to CIRO, sharing important communication in a timely manner and conducting oversight in an effective manner while minimizing resources required from other recognizing regulators.</p>29-Jun-2023 05:21:00{0A4A024C-9E6C-412C-BC46-17930E8F0681}https://www.stikeman.com/en-ca/kh/canadian-securities-law/enhanced-total-cost-reporting-for-investment-funds-and-segregated-funds-coming-in-2026Darin R. Rentonhttps://www.stikeman.com/en-ca/people/r/darin-r-rentonCanadian Securities LawEnhanced Total Cost Reporting for Investment Funds and Segregated Funds Coming in 2026<p><strong>The Canadian Securities Administrators (“CSA”) and the Canadian Council of Insurance Regulators (“CCIR”) have published enhanced cost disclosure reporting requirements for investment funds, excluding private funds and labour-sponsored investment funds (“LSIFs”), and new cost and performance reporting requirements for individual variable insurance contracts (“Segregated Fund Contracts”), impacting reporting requirements for dealers, advisers and investment fund managers.</strong></p> <p><a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-04/csa_20220420_31-103_nop-total-cost-reporting.pdf">Securities law amendments and insurance guidance related to total cost reporting</a> (the “TCR Enhancements”) are being implemented to increase investor awareness of the ongoing, embedded costs of owning mutual funds, exchange-traded funds, scholarship plans and Segregated Fund Contracts, including management fees and trading expenses, as well as to improve policy holders’ awareness of rights to guarantees under Segregated Fund Contracts and how their actions might affect their guarantees. Currently, securities registrants and insurers are not required to provide ongoing reporting to investors or policy holders on such costs after the initial sale of an investment fund product.</p> <p>The TCR Enhancements are expected to come into force on <strong>January 1, 2026</strong>. Both securities registrants and insurers will be required to deliver the first annual reports that incorporate the TCR Enhancements for the year ending December 31, 2026.</p> <p>The CSA and CCIR have also launched a <a rel="noopener noreferrer" target="_blank" href="https://www.securities-administrators.ca/news/canadian-financial-regulators-announce-establishment-of-total-cost-reporting-implementation-committee/">total cost reporting implementation committee</a> (the “Committee”) with the participation of the Canadian Investment Regulatory Organization. The Committee will support industry stakeholders in their implementation of the TCR Enhancements within the transition period, which ends December 31, 2025, by providing guidance and responding to questions.</p> <h2>Securities Law Amendments</h2> <p>The TCR Enhancements will expand the annual report on charges and other compensation requirements in National Instrument 31-103 <em>Registration Requirements, Exemptions and Ongoing Registrant Obligations</em> and its companion policy to include the following information with respect to certain investment fund securities:</p> <ul> <li>the aggregate dollar amount of fund expenses;</li> <li>the aggregate dollar amount of any direct fund charges (e.g., short-term trading fees or redemption fees); and</li> <li>the fund expense ratio, as a percentage, for each investment fund class or series.</li> </ul> <p>The TCR Enhancements also outline certain notifications that must be provided to investment fund clients, including:</p> <ul> <li>information about fund expenses and how they are deducted;</li> <li>that clients should refer to the prospectus or fund facts document of each investment fund for details on fund expenses and performance, and to the latest account statement for information about market value and ownership;</li> <li>a statement about any action that may be available to the client;</li> <li>information about deferred sales charges, if applicable;</li> <li>an explanation of any other direct fund charges;</li> <li>that approximations and assumptions are used in calculating costs, if applicable;</li> <li>a statement about products that are exempt from the reporting requirements but which may have embedded fees;</li> <li>that fund expenses and fund expense ratios of foreign investment funds may differ, if applicable; and</li> <li>that third-party fees (e.g., custodial fees, intermediary fees or interest charges) may not be included.</li> </ul> <p>Structured products, LSIFs and private funds are excluded from these requirements due to the differences between how those products operate and potential implementation issues. Existing exemptions for statements and reports provided to non-individual permitted clients, including institutional investors, continue to apply.</p> <h2>Insurance Sector Enhancements</h2> <p>An enhanced cost and performance reporting disclosure framework for Segregated Fund Contracts will be outlined in the Individual Variable Insurance Contract Ongoing Disclosure Guidance and will apply to all insurers offering Segregated Fund Contracts to their policy holders. In an effort to align the insurance and securities sectors, additional guidance on ongoing performance disclosure and ongoing disclosure with respect to Segregated Fund Contract guarantees will also be included. The TCR Enhancements related to Segregated Fund Contracts are expected to be adopted by member jurisdictions by way of local guidance or regulation with effective dates to match those of the securities law amendments.</p> <h2>Transition and Implementation</h2> <p>Securities registrants and insurers are encouraged to use the transition period to begin reviewing systems and planning for implementation and testing prior to January 1, 2026. The transition period was extended in light of significant implementation issues and concerns identified in comment letters and further consultations.</p>29-Jun-2023 02:47:00{432E75BB-F991-46D3-BC7F-562350538163}https://www.stikeman.com/en-ca/kh/canadian-employment-labour-pension-law/salina-v-investors-group-employers-do-not-owe-a-duty-of-care-to-employeesTamara Ticollhttps://www.stikeman.com/en-ca/people/t/tamara-ticollAlexandra Urbanskihttps://www.stikeman.com/en-ca/people/u/alexandra-urbanskiCanadian Employment, Labour & Pension LawCanadian Securities LawLitigation UpdateSalina v. Investors Group: Employers Do Not Owe a Duty of Care to Employees in Connection with Workplace Investigations<p><strong>In <em>Salina v. Investors Group Financial Services Inc.</em>, </strong><a rel="noopener noreferrer" target="_blank" href="https://canlii.ca/t/jv0gl"><strong>2023 BCSC 86</strong></a><strong> (the “Decision”), the Supreme Court of British Columbia (the “Court”) considered the question of whether an employer owes its employee a duty of care in conducting internal investigations of their employees’ conduct. Drawing on appellate jurisprudence, the Court ultimately found that employers do not owe such a duty of care to their employees. The Decision offers guidance and key assurances to employers navigating internal workplace investigations as well as investigations by regulatory bodies. </strong></p> <h2>Background</h2> <p>The plaintiff, Mr. Salina, (the “<strong>Plaintiff</strong>”) was engaged by the defendant, Investors Group Financial Services Inc. (the “<strong>Investors Group</strong>”) as an investment advisor pursuant to a consulting agreement entered into in 2002. Both the Plaintiff and the Investors Group were regulated members of the Mutual Fund Dealers Association of Canada (“<strong>MFDA</strong>”). As a result, both parties were subject to the regulatory requirements, standards of practice, and rules of the MFDA bylaws and the British Columbia <a rel="noopener noreferrer" target="_blank" href="https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-418/latest/rsbc-1996-c-418.html?resultIndex=1"><em>Securities Act, </em>R.S.B.C., c. 418</a> (together, the “<strong>Rules</strong>”).</p> <p>In December 2016, the MFDA commenced an investigation of the Plaintiff relating to certain investment consultation services he provided to one of the Investors Group’s clients, to determine whether the Plaintiff had violated any of the Rules. The MFDA also investigated the Investors Group due to its oversight of various transactions performed by the Plaintiff. During the course of these investigations, and as part of its regulatory reporting obligations, the Investors Group provided information to the MFDA in respect of the Plaintiff. Both parties ultimately entered into settlement agreements with the MFDA.</p> <p>The Plaintiff was terminated for cause in May 2018 while the MFDA investigations were ongoing. The Plaintiff then commenced an action for wrongful dismissal against the Investors Group. Among other things, the Plaintiff plead that he was not an independent contractor, but an employee, and that the Investors Group breached its duty of care owed to him by having:</p> <ul> <li>“<strong>negligently </strong><strong>conducted their investigation</strong> about the Plaintiff”; and</li> <li>“<strong>reported inaccurate information</strong> about the Plaintiff to the MFDA”.</li> </ul> <p>The Investors Group brought an application to strike those pleadings for failing to disclose a reasonable cause of action against the Investors Group and for being bound to fail and/or for abuse of process as they amounted to a collateral attack on the MFDA process.</p> <p>Notably, the Decision does not make findings of fact as to the propriety of the Investors Group’s internal investigation, or reporting to the MFDA, but rather, considers whether the Plaintiff had a proper cause of action in respect of same.</p> <h2>The Plaintiff’s Position</h2> <p>The Ontario Court of Appeal has made clear that for public policy reasons, there is no liability in tort for an employer conducting a negligent internal investigation into employee conduct.<a href="#_ftn1" name="_ftnref1"><sup>[1]</sup></a> More specifically, it has been held that recognizing such a tort would: be inconsistent with the Supreme Court of Canada’s refusal to recognize an action in tort for breach of a good-faith and fair dealing obligation in the context of employment dismissals, and have a potential chilling effect on non-professional investigators.<a href="#_ftn2" name="_ftnref2"><sup>[2]</sup></a></p> <p>Despite the foregoing, the Plaintiff took the position that his claim against the Investors Group for negligent conduct of its investigation was <em>not</em> bound to fail. Pointing to the decision in <em>Hill v. Hamilton-Wentworth Regional Police Services Board, </em><a rel="noopener noreferrer" target="_blank" href="https://scc-csc.lexum.com/scc-csc/scc-csc/en/2382/1/document.do">2007 SCC 41</a> (“<strong><em>Hill</em></strong>”), which recognized the tort of negligent investigation as applied to police officers and found that the police owed a duty of care in negligence to suspects, the Plaintiff argued that a similar duty of care was owed to the Plaintiff because the investigation in question was in support of a quasi-judicial hearing. According to the Plaintiff, it was not plain and obvious that the reasoning in <em>Hill </em>would not extend to the case at bar because the MFDA regulates “in furtherance of the public interests with investigative and enforcement powers.”</p> <h2>The Decision of the Court</h2> <p>The Court rejected the Plaintiff’s arguments, and ultimately struck the Plaintiff’s claims against the Investors Group regarding negligent investigation and negligent reporting. The Court held that these claims disclosed no reasonable cause of action and were bound to fail as: 1) the Investors Group did not owe the Plaintiff a duty of care in connection with their internal investigation; and 2) the communications between the MFDA and the Investors Group were protected by absolute privilege.</p> <h3><strong>No Duty of Care </strong></h3> <p>To determine whether a duty of care was owed to the Plaintiff, the Court applied the two-part <em>Anns </em>test:</p> <ul> <li>Does the relationship between the plaintiff and the defendant disclose sufficient foreseeability and proximity to establish a <em>prima facie </em>duty of care?</li> <li>If so, are there any policy considerations that should nevertheless negate or limit that duty of care?</li> </ul> <p>The parties conceded that it was reasonably foreseeable that the Plaintiff could face discipline and other financial consequences as a result of a negligently conducted investigation such that the first prong of the test was satisfied. The Decision, therefore, turned on the question of whether policy considerations could negate the existence of a duty of care in the circumstances.</p> <p>Drawing on <em>Correia</em>, the Court found that public policy favoured the reporting of wrongdoing and that recognizing a duty of care in this instance could have a chilling effect on same. The Court recognized that these policy considerations did not necessarily apply to an individual decision maker guilty of malicious investigation, but in this case, there was no allegation made by the Plaintiff against any individual.</p> <h3><strong>Reporting to MFDA Protected by Absolute Privilege</strong></h3> <p>As to the Plaintiff’s allegation that the Investors Group was negligent in the provision of inaccurate information to the MFDA, the Court found that a person giving evidence to a court or adjudicative tribunal enjoys absolute immunity from a suit in respect of the evidence, even if what was said was false or made with malicious intent.</p> <p>The Decision confirms that this absolute privilege extends to communications made in respect of complaints and regulatory proceedings carried out by self-regulating bodies, such as the MFDA. In light of the foregoing, the Court found that the communications between the Investors Group and the MFDA were protected by absolute privilege and as such could not give rise to civil liability.</p> <h2>Our Views</h2> <p>The Decision confirms that an employer who conducts a well-intentioned internal investigation will not attract liability for negligent investigation. Given this protection may not extend to an individual decision maker investigating with malicious intent, employers should ensure that all such investigations are conducted fairly and in good faith.</p> <hr /> <p><a href="#_ftnref1" name="_ftn1">[1]</a><em>Correia v. Canac Kitchens, </em>2008 ONCA 506 [<strong><em>Correira</em></strong>].</p> <p><a href="#_ftnref2" name="_ftn2">[2]</a> For a further discussion of the tort of negligent investigation, see the line of Ontario Court of Appeal and Supreme Court of Canada cases cited at paragraphs 26-27 of the Decision.</p>21-Jun-2023 08:30:00{21359CB3-E9AD-4C07-9152-4A7343F590A1}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-publish-2022-annual-oversight-report-on-sros-and-ipfsAlix d'Anglejan-Chatillonhttps://www.stikeman.com/en-ca/people/d/alix-d-anglejan-chatillonCanadian Securities LawCSA Publish 2022 Annual Oversight Report on SROs and IPFs<p><strong>The Canadian Securities Administrators (CSA) recently released their 2022 Annual Activities Report (Report) summarizing their key oversight activities and assessments of self-regulatory organizations (SROs) and investor protection funds (IPFs) for the calendar year 2022. </strong></p> <p>Formally designated as CSA Staff Notice 25-310, the Report covers the CSA’s assessment of the following SROs and IPFs:</p> <ul> <li>The former Investment Industry Regulatory Organization of Canada (IIROC) and Mutual Fund Dealers Association of Canada (MFDA) which amalgamated as of January 1, 2023 into a single SRO that, since June 1, has been officially known as the Canadian Investment Regulatory Organization (CIRO); and</li> <li>The former Canadian Investor Protection Fund (Former CIPF) and MFDA Investor Protection Corporation (MFDA IPC), which were combined as of January 1, 2023 under the Canadian Investor Protection Fund (CIPF) name.</li> </ul> <p>We <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-seek-comments-on-proposed-consolidated-sro-and-investor-protection-funds">previously wrote about</a> the application proposals for CIRO and the CIPF, which were published for comment last year. </p> <h2>Key Oversight Activities and Observations</h2> <p>The CSA performs oversight activities through a CSA Market Regulation Steering Committee and oversight sub-committees made up of representatives of each securities regulator. The oversight subcommittees hold quarterly meetings with each SRO and semi-annual meetings with each IPF, as well as ad hoc meetings relating to specific issues.</p> <h3>Oversight of amalgamation</h3> <p>Oversight of the amalgamation process for the SROs and IPFs was prioritized over the past year consisting of the review and approval of proposed new and amended rules, policies and constating documents as well as bi-weekly meetings to discuss and resolve issues as they arose. The CSA organized staff to manage the various aspects of the integration process into different workstreams, in order to consider comments and stakeholder input in the following areas:</p> <ul> <li>establishment of an enhanced governance structure,</li> <li>review of SRO/IPF recognitions and approval/acceptance applications,</li> <li>drafting SRO/IPF Recognitions Approval/Acceptance Orders and Memoranda of Understanding,</li> <li>considering any ancillary/consequential legislative amendments,</li> <li>revising methodology for CSA oversight of SROs and IPFs to align with the oversight principals for CIRO and CIPF,</li> <li>advancing the analysis of the issues relating to directed commissions/incorporated agents,</li> <li>enhancing market information sharing between the CSA and CIRO, and</li> <li>review of applications by the MFDA and IIROC seeking to use funds collected by the respective SROs from enforcement fines to pay for certain costs related to the SRO amalgamation.</li> </ul> <h3>IIROC activities</h3> <p>In 2022, IIROC oversaw all investment dealers and trading activity in debt and equity marketplaces in Canada and was approved as an information processor for corporate and government debt securities. The CSA note the following from meetings and discussions with IIROC:</p> <ul> <li><strong>Rule review:</strong> the CSA approved IIROC’s rule amendments relating to the futures segregation and portability customer protection regime. This aligns with rule changes at the Canadian Derivatives Clearing Corporation to implement a new customer protection futures segregation and portability regime based on the use of a gross customer margin model.</li> <li><strong>Market surveillance</strong>: upgraded infrastructure now processes and handles approximately 3 billion real-time messages per day (up from 1 billion pre-pandemic). In addition to equity messages, the system now also intakes derivatives trading data messages after a Memorandum of Understanding was implemented between IIROC and the Montreal Exchange regarding cross-market surveillance of the securities and derivatives market to mitigate market integrity breaches.</li> <li><strong>Order Execution Only (OEO) Service Levels</strong>: quantitative and qualitative data was collected from dealers with OEO trading platforms to assist in the consideration of investor protection issues that may arise from complaints from clients about service and interrupted access to investments. CIRO is currently reviewing options for an appropriate regulatory response to this highly technology dependent rapidly growing sector.</li> <li><strong>Short Selling</strong>: the CSA and CIRO are reviewing responses to a request for public feedback on areas for regulatory consideration to keep the regulatory framework current and appropriate. They are doing so in light of feedback with respect to short selling and international developments that we wrote about <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-revisit-short-selling-in-canada">here</a>.</li> <li><strong>Advertising and Social Media Guidance</strong>: an update to existing guidance is being developed by CIRO to reflect trends such as the growing use of social media influencers, gamification and third-party research reports based on non-traditional inputs such as social media sentiment indicators. The update is expected to be issued for public comment in 2023.</li> <li><strong>Crypto/Digital Assets</strong>: applications from crypto-trading asset platforms (CTPs) continue to be reviewed by CIRO under the guidance of CSA staff on the application of IIROC rules and securities legislation to CTPs so that targeted applications for exemption based on customized terms and conditions for each business model can be considered. Last October, <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/coinsquare-capital-markets-ltd-is-admitted-to-iiroc-membership-the-first-crypto-trading-platform">Coinsquare Capital Markets Ltd</a>. became the first CTP admitted to IIROC. The CSA granted it exemptive relief from certain IIROC requirements as well as time-limited relief from the prospectus and trade reporting requirements and certain provisions of the marketplace operation rules. In collaboration with CSA staff, CIRO is planning to develop new rules and guidance and standardized compliance procedures relating to crypto assets.</li> <li><strong>Cybersecurity Incidents</strong>: CSA staff were kept apprised of cybersecurity incidents that were reported to IIROC by their dealer members. IIROC developed further guidance on compliance with cybersecurity incident reporting requirements and a cybersecurity self-assessment tool was made available to dealer members to enable them to assess the strength of their cybersecurity defence systems and policies and areas for improvement.</li> <li><strong>Client Focused Reforms (CFRs)</strong>: the CSA, IIROC and MFDA harmonized their compliance modules related to CFR conflict of interest requirements. Through its annual request for information form, CIRO is collecting data to assist in compliance risk assessment and CFR conflict of interest review has been incorporated into regularly scheduled business conduct compliance exams. In conjunction with the results of the CSAs targeted conflict of interest compliance sweep, the regulators plan to publish consolidated findings and provide further guidance and enhanced conflict requirements.</li> <li><strong>OEO Trailer Ban</strong>: the OEO trailer ban, which we <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-adopt-restrictions-on-mutual-fund-trailing-commissions">previously wrote about</a>, came into effect on June 1, 2022. Its purpose is to prohibit fund organizations from paying trailing commissions to, and the solicitation and acceptance of trailing commissions by, dealers who are not subject to a regulatory obligation to make a suitability determination. Subsequently, a <a rel="noopener noreferrer" target="_blank" href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/regulators-issue-temporary-exemptions-from-the-oeo-trailer-ban">temporary exemption</a> was put in place to facilitate the implementation process and IIROC updated its OEO compliance module to review the process to ensure all switches are conducted correctly, rebates are paid, and trade confirmations and other client communications are sent in accordance with the conditions of the temporary exemption.</li> </ul> <h3>MFDA activities</h3> <p>In 2022, the MFDA oversaw mutual fund dealers in Canada, except Québec where mutual fund dealers operating in the province were directly regulated by the Autorité des marchés financiers. The CSA note the following from meetings and discussions with the MFDA:</p> <ul> <li><strong>Cybersecurity</strong>: although smaller members tend to have limited resources in dealing with cyber security issues, they were found to be more prepared and invested in cyber protection than other sectors due to the generally high level of threat to the financial services industry. External consultants were engaged to test security controls, review the results of a mandatory cybersecurity survey and provide specific feedback to members.</li> <li><strong>Client Research Project</strong>: based on research reports from 2016 and 2019 which provided insight into members’ business models, approved persons and clients, and a 2021 mandatory data request, the MFDA worked with external consultants to analyze and publish the results in a report on December 30, 2022.</li> <li><strong>Expanded Cost Reporting</strong>: in collaboration with the CSA, IIROC and the Canadian Council of Insurance Regulators, the MFDA was involved in the development of enhanced cost disclosure reporting requirements for investment funds and segregated fund contracts which was published for comment in 2022, with plans for implementation in 2026.</li> <li><strong>Continuing Education</strong>: work continued with respect to continuing education requirements for mutual fund approved persons and the launch of the continuing education reporting and tracking system (CERTS).</li> </ul> <h3>Former CIPF activities</h3> <p>The Former CIPF provided certain protection to eligible clients of IIROC dealer member firms suffering losses if client property held by a member firm was unavailable as a result of insolvency of a dealer member. The CSA note the following from meetings and discussions with the Former CIPF:</p> <ul> <li><strong>Crypto Assets</strong>: crypto assets, crypto contracts, and other crypto-related property were expressly excluded from the new CIPF’s coverage policy. However, CIPF plans to regularly review the scope and terms of the policy with a focus on custody, control and pricing of crypto assets.</li> <li><strong>Simulation Exercises</strong>: participants engaged in phase 2 simulation exercises with a focus on the manner in which operational strategies, tools and regulatory processes changed during the pandemic and how these changes could impact the handling of a member firm insolvency. Other topics for future phases of simulation exercises are being considered.</li> <li><strong>Review of Adequacy of Level of Assets, Assessment Amounts and Assessment Methodology</strong>: the adequacy of the level of resources available in relation to risk exposure of IIROC member firms was reviewed using existing parameters, consisting of a credit-risk based fund model to project liquidity resource requirements.</li> <li><strong>Insolvencies</strong>: there were no IIROC member insolvencies in 2022 which involved the Former CIPF.</li> </ul> <h3>MFDA IPC activities</h3> <p>The MFDA IPC provided certain protection to eligible clients of MFDA mutual fund dealer member firms suffering losses as a result of the insolvency of a mutual fund dealer member. The CSA note the following from meetings and discussions with the MFDA IPC:</p> <ul> <li><strong>Fund Size Target</strong><em>: </em>the annual review of the general fund size is monitored for ongoing stability and the general fund size target of $50 million was reached.</li> <li><strong>Insolvencies</strong>: there were no MFDA member insolvencies in 2022 which involved the MFDA IPC.</li> <li><strong>Governance</strong>: the code of conduct for staff that was implemented in 2021 to mitigate any potential conflicts of interest will be expanded to include contract employees as recommended by CSA staff.</li> </ul> <p>The full Report can be found <a rel="noopener noreferrer" target="_blank" href="https://www.osc.ca/sites/default/files/2023-04/csa_20230420_2022-annual-activities-report.pdf">here</a>.</p>12-Jun-2023 07:28:00{3907B139-7CF9-4E32-90EF-0D562A366A7E}https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-provide-guidance-on-the-listed-issuer-financing-exemptionStikeman ElliottCanadian Securities LawCSA Provide Guidance on the Listed Issuer Financing Exemption<p><strong>On June 1, 2023, the Canadian Securities Administrators (CSA) published </strong><a rel="noopener noreferrer" target="_blank" href="https://lautorite.qc.ca/fileadmin/lautorite/reglementation/valeurs-mobilieres/0-avis-acvm-staff/2023/2023juin01-45-330-avis-acvm-en..pdf"><strong><em>CSA Staff Notice 45-330: Frequently Asked Questions about the Listed Issuer Financing Exemption</em></strong></a><strong> (the Notice) providing guidance on questions market participants have raised since the adoption of the listed issuer financing exemption (the Exemption) in November 2022. Those questions concerned, notably, the qualification criteria, the available funds requirement and the types of securities and offerings permitted. </strong></p> <p>As discussed in a previous <a href="https://www.stikeman.com/en-ca/kh/canadian-securities-law/csa-welcomes-new-capital-raising-prospectus-exemption-for-listed-issuers">blog post</a>, the Exemption allows seasoned reporting issuers with equity securities listed on a Canadian stock exchange to raise capital without filing a prospectus in an amount up to the greater of $5,000,000 and 10% of their market capitalization (to a maximum of $10,000,000) in a 12-month period, in one or more tranches (the Maximum Offering Amount).</p> <h2>Qualification Criteria</h2> <p>Issuers must have equity securities listed on a recognized Canadian exchange and have filed all requisite periodic and timely disclosure documents to rely on the Exemption.</p> <p>In response to questions from market participants on these criteria, the CSA confirmed:</p> <ul> <li>The Exemption is not available to Issuers that are in default of securities legislation requirements.</li> <li>Issuers that do not have listed equity securities trading on a Canadian exchange <em>at the time of distribution</em> cannot rely on the Exemption. Accordingly, an exchange listing must be completed prior to, and not concurrent with or following, the closing of the offering.</li> </ul> <p>For the Exemption to be available, the distribution, combined with all other distributions made by the issuer under the Exemption during the preceding 12 months, must also not result in an increase of more than 50% of the issuer’s outstanding listed equity securities. The CSA confirmed that common shares issuable on exercise of warrants must be included when calculating the dilution limit. However, as the common shares issuable on exercise of warrants are not part of the initial distribution, they are not required to be included in the calculation of the Maximum Offering Amount.</p> <h2>Available Funds Requirement</h2> <p>Issuers must reasonably expect to have available funds to meet their business objectives and liquidity requirements for a period of 12 months following the distribution (the Available Funds Requirement) to qualify for the Exemption.</p> <p>The CSA advised issuers to consider several factors in determining whether they meet the Available Funds Requirement and in setting a minimum offering amount, such as:</p> <ul> <li>the costs of their business objectives for the next 12 months (including the costs related to each significant event that must occur for the business objectives to be met);</li> <li>their cash flow from operations;</li> <li>the offering costs,</li> <li>their working capital or deficiency; and</li> <li>any committed sources of additional funding.</li> </ul> <p>If the available funds are not sufficient to cover business objectives and meet liquidity requirements for a period of 12 months, issuers must increase the minimum offering amount.</p> <p>Subject to the maximum amount that can be raised under the Exemption, issuers are permitted to close offerings under the Exemption in multiple tranches. If an issuer needs to raise a minimum offering amount to satisfy the Available Funds Requirement, it must raise this minimum amount in the first tranche. In addition, the last tranche must not be closed later than the 45<sup>th</sup> day after announcing the offering.</p> <h2>Types of Securities</h2> <p>The CSA has confirmed that issuers can use the Exemption to distribute flow-through shares and charitable flow-through shares provided all other conditions of the Exemption are met. The CSA has advised that the end purchaser of charitable flow-through shares must be named in the report of exempt distribution and have all statutory rights under the Exemption.</p> <p>The CSA also clarified that the Exemption is not available in connection with the distribution of broker’s warrants, which would not typically be listed equity securities. In addition, the Exemption is not available for the issuance of securities for debt, as issuers cannot solicit an offer to purchase before announcing the offering and filing the offering document.</p> <h2>Types of Offerings</h2> <p>In response to questions from market participants, the CSA has advised that the Exemption can be used for bought deal offerings provided that:</p> <ul> <li>The bought deal is conducted in such a way that the actual purchaser has all of the rights contemplated under the Exemption and is named in the report of exempt distribution.</li> <li>The underwriter does not end up having to purchase any left-over securities.</li> <li>Any marketing of the offering complies with the conditions of the Exemption so that no solicitations occur prior to the issuance and filing of the news release and the offering document.</li> </ul> <p>The CSA also confirmed that issuers can use the Exemption concurrently with other prospectus exemptions. However, issuers cannot use the Exemption in Quebec concurrently with a prospectus in other provinces.</p>09-Jun-2023 08:23:00