Friday Finds – September 13, 2019

By Richard Neil Kennedy

Welcome back to another installment of Friday Finds on the CBLB! What better way to kick-off the weekend than a round-up of the top five corporate and securities law news stories that have been circulating headlines. Our stories touch on the Ontario Securities Commission’s (OSC) settlements with some major Canadian banks, proposed provincial and national regulatory changes, and the potential buyout of the London Stock Exchange.

In enforcement news, the OSC has approved settlement agreements with the Royal Bank of Canada (RBC) and the Toronto-Dominion Bank (TD) related to failures in the banks’ foreign exchange trading business. Specifically, the settlements state that RBC and TD failed to monitor their foreign exchange traders and, between 2011 and 2013, there were hundreds of instances were these traders shared confidential client information through online chatrooms. The information included trade sizes, timing of trades, prices, stop-loss levels, and other confidential client information. This information gave traders an unfair advantage in the market by allowing them to front-run trades. Although it is only RBC and TD facing sanctions now, this behaviour was occurring all over the world. The settlements total for over $24 million, with RBC paying about $14 million and TD about $10 million. These settlements have also prompted the OSC to ask industry participants to assess their foreign exchange markets and determine whether their compliance mechanisms are effective. In addition, the OSC plans to review the foreign exchange compliance programs of Ontario’s largest derivative dealers. It will be interesting to see if any of RBC or TD’s clients take the banks to court for this compliance failure.

In national regulatory news, the Canadian Securities Administrators (CSA) announced on Thursday proposed amendments to the business acquisition report (BAR) requirements. Businesses must submit a BAR after a significant acquisition, with the purpose of providing investors with historical information of these acquisitions. The amendment would reduce the regulatory burden for reporting issuers who are attempting to acquire a business. Specifically, the proposed amendments will increase the threshold of what constitutes a “significant acquisition” that triggers the BAR requirement. Currently, if any one of three significant tests in the national policy exceed 20% then a filing of a BAR is required. The three tests are 1) the asset test, 2) the investment test and 3) the profit or loss test. The proposed amendments would mandate that two of the three tests need to be triggered to a threshold of 30% before a BAR is required, significantly increasing the threshold.  Completing a BAR is expensive and, in some circumstances, the data is hard to obtain. Thus, by increasing the threshold that triggers the BAR requirement, businesses can save some resources. The Chair and President of the CSA (and CEO of Quebec’s Autorité des marches financiers) claimed that “the proposed changes align with the CSA’s goal of streamlining regulation without compromising investor protection”. It will be interesting to see what comments are submitted in response to this proposed amendment.

In provincial regulatory news that also came out on Thursday, the OSC introduced a more flexible fee certification process. Specifically, prior to the announcement, only the Chief Compliance Officer (CCO) could certify and submit the firm’s capital markets participation fee forms. Under the proposed amendment, other specified senior officers, such as the Chief Financial Officer (CFO), could also certify and submit such forms. This amendment is aimed at reducing the number of senior officers that have to review the data which should save firm’s some resources. Indeed, if the CFO is already reviewing the relevant information, then it may not be useful to anyone to force the CCO to duplicate the work and, under the proposed amendments, they no longer have to. The amendments still need to receive ministerial approval so, for now, the CCO us still the sole authority for certifying and submitting a firm’s capital markets participation fee forms.

In research news, market-leading proxy advisory firm International Shareholder Services (ISS) released some of the findings from its 2019 Global Benchmark Policy Survey and some of the results are optimistic. The survey showed that a majority of investors (61%) and non-investors (55%) believe that gender diversity on boards of directors is an essential attribute of effective board governance. This finding was irrespective of whatever industry or market the firm was operating in. There was also a majority of investors (60%) who believed that firms should be evaluating and disclosing their climate-related risks to investors. It also found that a significant number of investors (45%) believe that non-executive directors should not be sitting on more than four boards while executive directors – like the President of a firm – should not be sitting on more than two. This question arises from the concern of “over-boarding”, which occurs when a director sits on so many boards that their effectiveness is significantly harmed. Not only are these results interesting, they are also important as ISS may use them to inform their voting policies for the upcoming proxy season. These voting policies could affect Canadian firms that are evaluated by the ISS and may reflect some changes in the values of investors.

Lastly, in international news, the Hong Kong Exchanges and Clearing company (HKEX) has offered an unsolicited, £30 billion (almost $49 billion CAD) bid to purchase the London Stock Exchange (LSE). If successful, the purchase would create the third largest stock exchange in the world, behind only the New York Stock Exchange and the Nasdaq. Of course, the sale would need to be approved by LSE’s shareholders and the United Kingdom government and regulators. It is unlikely that the government would be willing to approve the sale of such an important element of the country’s financial system without an incredible amount of scrutiny. But it is not just UK regulators who would want to be involved as the United States also has a connection to the LSE. Specifically, the LSE owns the London Clear House (LCH), which is co-regulated by the United States Commodity Futures Trading Commission and the Bank of England. The LCH clears most of the domestic interest rate swaps in the United States and, thus, affects US markets and any transfer of its ownership would surely attract the attention of its regulators. Although it is unclear how this purchase could affect the Canadian markets or Canadians investments in the London Stock Exchange, it is surely a development we will continue to follow.

That wraps up this week of Friday Finds! Thanks for joining us and be sure to check back next week for another round-up of the top business and securities law news stories.