Robert Keller

07-16-2020

IIROC Board grants TD Waterhouse CRM2 exemption

In a fairly unusual move, the Board of Directors of the Investment Industry Regulatory Organization of Canada ("IIROC") granted an exemption to TD Waterhouse Canada Inc. for its non-compliance with certain requirements of the "Client Relationship Model" rules (often referred to as "CRM2", as they were the second phase of certain rule amendments relating to client relationships), which went into effect on December 31, 2015. In the decision, which was attached to a Rules Notice issued today, the Board permanently allows the firm not to comply with the requirement to provide all retail clients with certain asset cost information as at December 31, 2015. This decision follows the issuance of a disciplinary hearing panel decision in March 2020, which imposed a $4 million fine (just $1 million short of the maximum allowed by IIROC Rules) on the firm for its past misconduct in this matter. The Board's exemption, as the decision explains, is intended to be prospective (i.e. to normalize the conduct that has occurred subsequent to the pre-December 2018 time period at issue in the enforcement action, and which will now continue indefinitely). The Board took great pains to counter any suggestion of a "slippery slope" that could result from the exemption, noting that it did "not create an incentive for other Dealer Members to not comply with IIROC rules, and d[id] not result in unfairness to other Dealer Members." In particular, the Board pointed to the high cost paid by the firm for its non-compliance, not only in terms of the significant ($4 million) enforcement fine, but also as a result of other operational costs incurred to rectify the problem in or after December 2018, as well as certain reputational costs paid by the firm as a result of this incident. To read the full decision (which is dated May 27, 2020), click here.

06-25-2020

CSA seeks comment on proposed merger of IIROC and MFDA

In a notice published today, the Canadian Securities Administrators (the "CSA") announced their request for public comments on the recently proposed merger of the two primary self-regulatory organizations ("SROs") for Canada's securities industry: the Investment Industry Regulatory Organization of Canada ("IIROC") and the Mutual Fund Dealers Association (the "MFDA"). As acknowledged in the notice, there are historical reasons for the division of labor between the two SROs in Canada; most notably, as a result of the manner in which the Canadian mutual fund industry evolved over the 20th century, particularly in the 1980's and 90's, the CSA became concerned about the unique business and regulatory risks associated with dealers whose business was restricted to the distribution of mutual funds (as opposed to those of Canada's more traditional, full-service investment dealers). This ultimately led to the creation of the MFDA, at the behest of the CSA, in 1998. (Interestingly, the MFDA has no direct equivalent in the United States, where all dealers, even those focused on the distribution of mutual funds, are subject to the oversight of a single SRO--FINRA--provided they qualify as "broker-dealers" under applicable federal securities legislation; either way, mutual fund dealers are regulated by the SEC, in particular, under the Investment Company Act of 1940, which is itself a product of the unique historical evolution of the US mutual fund industry.) The proposal to merge IIROC and the MFDA has been floated a number of times over the years, but no formal action has ever been taken by either SRO, nor by the CSA. However, the June 25 CSA notice--which comes on the heels of the June 9 publication of a 44-page report by IIROC in favor of the merger, as well as the October 2019 publication of a decidedly pro-merger report by the C.D. Howe Institute--suggests that the shift to a single SRO has gained momentum. At the same time, some commentators have already signaled their skepticism and opposition to even the idea of a merger, on the grounds that, among other drawbacks, any "synergies" to be had from a merger are "especially elusive" in the regulatory sphere. Stakeholders have until October 23, 2020 to file their comments with the CSA--an atypically-long comment period, which is due to the challenges of conducting business during the continuing COVID-19 pandemic. It seems safe to assume that the CSA will receive a large volume of comments, no doubt reflecting varying and contradictory perspectives, in the upcoming months.

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06-16-2020

US Court of Appeals strikes down SEC's "Transaction Fee Pilot"

In a unanimous 3-to-0 decision, the U.S. Court of Appeals for the District of Columbia Circuit dealt the Securities and Exchange Commission (the “SEC”) a stinging blow today, striking down the “Transaction Fee Pilot” that the SEC had formally issued, as Rule 610T, in December 2018. The decision, while not totally unexpected, has wide-reaching ramifications, not just for U.S. securities dealers and marketplaces, but for their Canadian counterparts as well, given that the Canadian Securities Administrators (the "CSA") had pledged to undertake a parallel project that was expressly made “conditional” on the SEC’s Rule 610T proceeding as planned. See CSA Notice 23-325, Trading Fee Rebate Pilot Study. While there has been no formal statement from the CSA as of yet, the decision of the D.C. Circuit Court effectively puts the Canadian pilot on ice as well.

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06-11-2020

OSC releases investigative report on QuadrigaCX​

In a highly unusual move, the Ontario Securities Commission (the "OSC") today released a detailed, 36-page investigative report, prepared by enforcement staff, that outlines their findings with regard to the collapse of the ill-fated crypto-currency platform, QuadrigaCX. As explained in the news release announcing the report, the demise of the firm affected roughly 76,000 investors (approximately 40% of whom reside in Ontario), resulting in net losses of CAD $169 million. The news release also highlighted the unique circumstances of this case, including the death of the firm's founder and CEO (and the primary perpetrator of the fraud that caused its collapse), Gerald Cotten. As a result of these circumstances, OSC staff—in lieu of pursuing an enforcement action—decided to seek (and, ultimately, obtained) approval from an OSC hearing panel, under subsection 17(1) of the Securities Act (Ontario), to publish the report, which contains information that would otherwise be protected by confidentiality restrictions. To read the full report, click here. 

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04-16-2020

IIROC postpones implementation of "Plain Language" Rulebook

Due to the COVID-19 pandemic and a concurrent announcement by the Canadian Securities Administrators relating to the postponement of the first phase of their "Client Focused Reform" ("CFR") amendments, the Investment Industry Regulatory Organization of Canada ("IIROC") today announced that it was postponing the implementation of its new "Plain Language" Rulebook to December 31, 2021, except that certain IIROC rule amendments meant to harmonize with the conflict-of-interest-related CFR amendments would go into effect on the same date set by the CSA for those amendments, namely, June 30, 2021. For more information, please see IIROC Rules Notice 20-0079.

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08-22-2019

IIROC announces effective date for "Plain Language" version of Dealer Member Rules

The Investment Industry Regulatory Organization of Canada ("IIROC") today announced that the final version of its "Plain Language" Dealer Member Rules will go into effect on June 1, 2020 (except for certain sections for which implementation is being delayed to allow Dealer Members additional time to make any necessary operational adjustments, as noted in the OSC approval notice also published today). The "Plain Language" rule rewrite project, which began in 2009, following the 2008 merger that created IIROC (combining the Investment Dealers Association and Market Regulation Services Inc.), for now omits the incorporation of the Universal Market Integrity Rules, which shall continue as a standalone rule book. The final "Plain Language" version of the Dealer Member Rules--which shall now be known as the "IIROC Rules"--may be viewed on the IIROC website here.

11-16-2016

Omega subject to a possible suspension by the OSC​
The Financial Post reported on November 14, 2017 that Ontario Securities Commission staff had filed an Application on November 13 (made public on November 14) with the Commission requesting a temporary suspension of all operations of Omega Securities Inc., a Canadian registered investment dealer (marketplace) that operates two alternative trading systems, Omega ATS and Lynx ATS. OSC staff are alleging  serious violations of Ontario securities laws. A hearing before the Commission is scheduled to take place at OSC headquarters in Toronto at 10 am on Friday, November 17. Pursuant to a notice issued by OSC staff, Canadian marketplaces and marketplace participants were reminded that they may declare "self-help" in the current circumstances, pursuant to, respectively,  subsection 6.2(a) and paragraph 6.4(a)(i) of National Instrument 23-101 Trading Rules, and sources say that several marketplaces have done so. The outcome of this hearing could have a significant impact on the Canadian marketplace landscape, so stay tuned for developments.

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12-06-2016

Decision of the OSC in the Finkelstein insider trading case is upheld in part, reversed in part on appeal
In a decision dated December 2, 2016, the Ontario Divisional Court upheld certain 2015 findings of a panel of the Ontario Securities Commission (OSC), which had held a former Bay Street lawyer, Mitchell Finkelstein, responsible for illegal tipping with regard to certain significant Canadian capital markets transactions, in violation of section 76 of the Ontario Securities Act. The court also upheld certain findings of the OSC regarding other respondents, who had been held liable by the OSC panel for insider trading, in violation of section 76 of the Act, and actions contrary to the public interest, in violation of section 127 of the Act. The court, however, reversed the OSC's findings with regard to one respondent, Man Kin (aka Francis) Cheng. According to the court, "The [OSC] Panel made a number of factual errors in its analysis of the evidence against Cheng ... [which]  undermine the foundation upon which the Panel concluded that Cheng ought to have known that he was receiving inside information." Finkelstein v. Ontario (Securities Commission), 2016 ONSC 7508 at para. 132. On these grounds, the court found that Cheng had not violated the Securities Act by engaging in trades concerning the single security with respect to which he had allegedly been tipped, and it therefore granted Cheng's appeal. To read the full decision, click here.

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04-01-2016

IIROC's CEO calls for legislative changes to improve fine collection

On April 1st, the Globe and Mail published an op-ed authored by IIROC's CEO, Andrew Kriegler, in which Mr. Kriegler calls for changes to provincial securities law that would expressly enable IIROC to collect unpaid fines levied as part of regulatory penalties ordered by hearing panels against individuals found liable for IIROC Rule violations. He also announced efforts to set up formal agreements with other regulatory bodies to ensure that information about rule violators is shared. Read the full article here.

09-30-2015

IIROC announces expedited approval for rule amendments to shorten quiet periods for research reports

On September 24, 2015, the Investment Industry Regulatory Organization of Canada (IIROC) announced immediate implementation of a rule amendment that was hotly anticipated by the Canadian securities industry: a change to Requirement 14 of IIROC Dealer Member Rule 3400 to bring Canadian quiet periods for research reports into line with recently amended U.S. regulations. Specifically, IIROC's rule amendments reduce the 40-day quiet period for initial public offerings to 10 days and the 10-day quiet period for secondary offerings to 3 days. IIROC published twin Rules Notices (IIROC Rules Notices 15-0216 and 15-0217) announcing that its Board and its Recognizing Regulators had approved the amendments for implementation effective September 25, 2015--the same date on which the equivalent amendments to the corresponding U.S. regulation (FINRA Rule 2241) became effective. IIROC requested public comments, as it normally does for a substantive rule amendment such as this, but its twin Rules Notices make clear that the amendments have already gone into effect. IIROC justified its unusual decision to carry out implementation prior to the normal public comment period on the grounds that it was necessary to "create a regulatory framework that ensures a level playing field for research report dissemination in the context of cross-border transactions between Canada and the United States" and to "prevent a substantial risk of material harm to [Canadian] investors, market participants and Dealer Members by harmonizing with requirements in the US." IIROC Rules Notice 15-0217 at 1. This will no doubt be a relief to Canadian securities dealers, particularly those dealing with cross-border offerings.

09-04-2015

SEC approves new FINRA rule shortening quiet periods for research reports

The Financial Industry Regulatory Authority (FINRA) announced on August 15, 2015 that the U.S. Securities and Exchange Commission had approved new consolidated FINRA Rule 2241, which, among other things, shortens the applicable quiet periods for research reports issued by FINRA-regulated securities dealers from 40 days (or in some cases, 25 days) to 10 days following an initial public offering (IPO) and from 10 days to 3 days following a secondary offering, where the dealer has participated as an underwriter or dealer in the IPO or as a manager or co-manager of the secondary offering, respectively. See FINRA Regulatory Notice 15-30. The new quiet periods for U.S. securities dealers become effective on September 25, 2015. This will create a discrepancy between the rules applicable to U.S. dealers and those applicable to Canadian dealers under current IIROC Dealer Member Rule 3400, which for the moment, will continue to require Canadian securities dealers to observe the 40-day and 10-day quiet periods in similar circumstances. See IIROC Dealer Member Rule 3400, Requirement 14. This discrepancy is of particular concern to Canadian securities dealers that provide research coverage of securities also covered by U.S. dealers, as Canadian firms will be operating on an unlevel playing field so long as the Canadian regulations continue to impose a stricter standard on Canadian firms. It also creates a potential disadvantage for Canadian investors, as pointed out by the Investment Industry Association of Canada in a letter to IIROC dated April 24, 2015, since Canadian investors will not be privy to the same research information at the same time as U.S. investors, unless they deliberately seek it out from U.S. dealers, which could create additional regulatory headaches for U.S. securities dealers that have Canadian affiliates. IIROC may be considering an amendment to its quiet period requirements to harmonize them with the new FINRA rule, but so far, IIROC has made no official public statement on the issue. Stay tuned for further developments.