By Danica Bennewies
Another week is coming to a close, which means its time for another installment of Friday Finds. In this weekly series we share five of the top corporate and security law news stories from the past week that grabbed our interest. In this week’s installment, we have stories from the regulators, the cannabis sector, an update on the highly anticipated WeWork IPO and more. Keep reading to find out which news stories dominated this week’s headlines.
In regulatory news, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, (OSFI) is adding a new dimension to how it assesses risk in Canada’s financial institutions. According to sources close to the matter, the OSFI is surveying Canadian banks to get a better understanding of how corporate culture creates risks for their major lenders. This survey involves looking into a variety of bank policies, including codes of conduct and whistle-blower programs, as well as interviewing CEOs to determine what the attitude toward risk is coming from the top of these institutions. OSFI’s surveys are coming at a time when banking misconduct is in the regulatory spotlight around the world. Recently, we have seen a number of cases of misconduct being uncovered at Canadian banks. For example, last month the Royal Bank of Canada and the Toronto-Dominion Bank reached a collective $22.85-million settlement with the Ontario Securities Commission (OSC) over allegations that the banks failed to supervise foreign-exchange traders. OSFI confirmed that its new culture and conduct division is leading the surveys, though it didn’t provide details on the specific institutions being assessed. The banking regulator says that it will use the survey data collected as “diagnostic information” to investigate the connection between cultural norms, behaviours and attitude toward risk at Canadian financial institutions.
Last Friday marked a milestone in Canada’s growing cannabis industry, albeit not a positive one. The OSC has announced that it is bringing its first fraud case in the cannabis sector, against Canada Cannabis Corp. (CCC). In the statement of allegations released at the end of last week, the securities regulator claimed that CCC misused investor funds and three individuals at the company, Benjamin Ward, Silvio Serrano and Peter Strang, made false representations to investors. Between 2014 and 2016, CCC allegedly raised $3.2-million and US$8.8-million from 125 investors on the basis that these funds would be used to grow and develop CCC’s business. Instead, the OSC claims that $3-million of these funds were drawn from the firm by Ward, Serrano and Strang through a loan to a company owned by Serrano. On top of this claim, the OSC also alleges that an investor brief used to solicit investors in 2014 contained many untrue statements, including misrepresentations about what CCC owned and Ward’s educational background. None of the claims in the OSC’s eight-page statement of allegations have been proven yet, though an initial hearing is scheduled to take place in Toronto on September 30th. If the allegations against CCC and its three executives are proven, the OSC can impose penalties of up to $1-million for each breach of the Securities Act (Ontario).
Looking now at enforcement news on the other side of the country, the Alberta Securities Commission (ASC) announced that it reached a settlement with the Lutheran Church-Canada over allegations that the church misled investors. The ASC claimed that two of the church’s related companies and five of these companies’ top officers and directors accepted investments into two funds while failing to give investors key details about how this money would be used. Investors were allegedly unaware that the money was being used to fund a seniors’ housing development project in Calgary that had defaulted on its loan payments three years in a row and had insufficient assets to cover its debts. The two funds collectively raised over $130-million from investors and then went bankrupt in 2015. Under the settlement, the five respondents admitted to breaching securities laws and agreed to pay $600,000 in penalties, the majority of which will be paid out to investors. In contrast, the corporate respondents did not pay any settlement funds, so as to ensure that any eligible corporate assets could be recovered by investors through the insolvency proceedings.
Moving across the pond, we have news from the UK’s Financial Conduct Authority (FCA). The financial market regulator has reviewed its “unbundling” rules adopted last year and found that they’ve been paying off for investors. The rules, which require asset managers to pay for research costs directly rather than bundling them with brokerage business, were implemented in January 2018 as part of the Markets in Financial Instruments Directive (MiFID II). MiFID II was intended to improve the transparency of financial markets across the EU, and the FCA’s review shows that at least the unbundling portion of the directive has been effective. The new rules have increased asset managers’ cost sensitivity and improved their accountability in terms of both research and execution costs. In fact, many asset management firms are choosing to pay for research costs out of their revenues, rather than charging clients. With firms putting the research costs on their own tabs, research budgets have seen a 20-30% drop, yet firms are still able to get the quality and quantity of research necessary to make investment decisions. According to the FCA, the implementation of these unbundling rules has resulted in investor savings of £70-million in the first six months following implementation, and predicts that investor savings could total £180-million per year. While the FCA will continue to monitor the ongoing impact of the rule changes, it says that it has not yet uncovered any instances of asset managers hiding research payments in inflated sales commissions and is overall looking positively on the impact of the rules.
Finally, let’s finish off with a bit of news from the US. So far in 2019 we’ve seen a number of highly anticipated IPOs, including Uber and Lyft. WeWork owner We Company was set to follow suit with an IPO this month, however the office-sharing start-up got cold feet on Monday and announced that it will be postponing its public debut. The past few months leading up to the IPO have been rough for We Company, as prospective investors raised concerns regarding the sustainability of its business model and its corporate governance standards. Amid these concerns, We Company’s initial valuation in January of US$47-billion has since dropped to around $10-billion. Just this past Friday, We Company unveiled changes to its corporate governance model to address some of these concerns. These included reducing founder Adam Neumann’s high-vote stock from 20 votes per share to 10, putting limits on the amount of We Company’s stock he can sell in the second and third years following the IPO, and promising to appoint a lead independent director by the end of the year. While these governance changes introduce a bit more board independence and supervision into We Company’s governance structure, this apparently wasn’t enough to make the start-up feel confident moving forward with its IPO. We’ll have to wait and see if We Company gets a better reception from the market in a few months.
That wraps up this week’s Friday Finds – thanks for joining us! We’ll be back again next week with another round-up of the biggest corporate and securities law stories.