NP 12-203 Cease Trade Orders for Continuous Disclosure Defaults NOTICE OF NATIONAL POLICY 12-203 CEASE TRADE ORDERS FOR CONTINUOUS DISCLOSURE DEFAULTS Introduction The Canadian Securities Administrators (CSA regulators or we), have adopted National Policy 12-203 Cease Trade Orders for Continuous Disclosure Defaults (the Policy). The Policy provides guidance to reporting issuers, investors and market participants as to how we will generally respond to certain types of continuous disclosure defaults. Background On March 28, 2008, we published a proposed version of the Policy for comment. During the comment period, which ended on May 27, 2008, we received four comment letters. We thank the commenters for their submissions. We have considered the comments and are publishing a summary of comments and responses as Appendix A to this notice. The summary includes the names of the commenters, a summary of their comments and our response. After considering the comments, we have made a number of minor changes to the version of the Policy that we published for comment. However, as these changes are not material, we are not republishing the Policy for a further comment period. Substance and Purpose The Policy • modernizes, harmonizes and streamlines our existing practices relating to cease trade orders (CTOs) including general CTOs and management cease trade orders (MCTOs); • provides guidance for issuers as to the circumstances in which the CSA regulators will issue a general CTO or an MCTO; • explains factors the CSA regulators will consider when evaluating an application for an MCTO; and • describes what other actions issuers need to undertake if we issue an MCTO. The Policy replaces: • CSA Staff Notice 57-301 – Failing to File Financial Statements on Time – Management Cease Trade Orders;
-2- • CSA Staff Notice 57-303 – Frequently Asked Questions Regarding Management Cease Trade Orders Issued as a Consequence of a Failure to File Financial Statements; and • Ontario Securities Commission Policy 57-603 – Defaults by Reporting Issuers in Complying with Financial Statement Filing Requirements. These instruments have been rescinded with the adoption of the Policy. Summary of the Policy The Policy provides guidance as to how the CSA regulators will ordinarily respond to a specified default (as defined in part 2 of the Policy) by a reporting issuer. This response will usually be the issuer’s principal regulator issuing either a general CTO or an MCTO. The Policy describes the criteria the CSA regulators will apply when assessing whether to issue a general CTO or an MCTO and outlines what an issuer needs to include in its application for an MCTO. The Policy also describes what information an issuer must file during the period of an MCTO to support informed trading. The Policy recommends that issuers monitor trading by management and other insiders during the period of default and reminds insiders of their trading prohibitions under securities legislation. Finally, the Policy discusses the effect of a CTO issued by a CSA regulator in one jurisdiction on trading in another jurisdiction. Unpublished materials In developing the Policy, we have not relied on any significant unpublished study, report, decision or other written materials. Questions Please refer your questions to any of: Alberta Securities Commission Blaine Young Jonathan Taylor Associate Director, Corporate Finance Manager, CD Compliance & Market 403 297 4220 Analysis blaine.young@seccom.ab.ca 403 297 4770 jonathan.taylor@seccom.ab.ca Celeste Evancio Legal Counsel, Corporate Finance 403 355 3885 celeste.evancio@seccom.ab.ca
-3-Autorité des marchés financiers Nicole Parent Edvie Élysée Analyste, Direction des marchés des capitaux Analyste, Direction des marchés des capitaux 514-395 0337 extension 4455 514 395 0337, extension 4416 nicole.parent@lautorite.qc.ca edvie.elysee@lautorite.qc.ca British Columbia Securities Commission Andrew Richardson Allan Lim Deputy Director, Corporate Finance Manager, Corporate Finance 604 899 6730 (direct) 604 899 6780 (direct) 800 373 6393 (toll-free in BC and Alberta) 800 373 6393 (toll-free in BC and Alberta) arichardson@bcsc.bc.ca alim@bcsc.bc.ca Sheryl Thomson Scott Pickard Senior Legal Counsel, Corporate Finance Senior Securities Analyst, Corporate 604 899 6778 (direct) Finance 800 373 6393 (toll-free in BC and Alberta) 604 899 6720 (direct) sthomson@bcsc.bc.ca 800 373 6393 (toll-free in BC and Alberta) spickard@bcsc.bc.ca Manitoba Securities Commission Bob Bouchard Director, Corporate Finance 204 945 2555 bob.bouchard@gov.mb.ca New Brunswick Securities Commission Pierre Thibodeau Senior Securities Analyst, Corporate Finance 506 643 7751 pierre.thibodeau@nbsc-cvmnb.ca Nova Scotia Securities Commission Bill Slattery Acting Director of Securities 902 424 7355 slattejw@gov.ns.ca
-4-Ontario Securities Commission Kelly Gorman Jasprit Gill Manager, Corporate Finance Senior Legal Counsel, Corporate Finance 416 593 8251 416 593 2167 kgorman@osc.gov.on.ca jgill@osc.gov.on.ca Matthew Au, Senior Accountant, Corporate Finance 416 593 8132 mau@osc.gov.on.ca Saskatchewan Financial Services Commission Ian McIntosh Deputy Director, Corporate Finance 306 787 5867 ian.mcintosh@gov.sk.ca August 29, 2008
Appendix A Summary of Comments List of commenters Commenter Signatory Date of Comment Letter Market Regulation Services Felix Mazer May 15, 2008 Inc. Policy Counsel Market Policy and General Counsel’s Office Ontario Bar Association Greg Goulin May 28, 2008 Business Law Section President Securities Law Ontario Bar Association Subcommittee Paul J. Stoyan Chair, Business Law Section Ontario Bar Association Research Capital Vanessa M. Gardiner April 15, 2008 Director, Senior Vice- President and Chief Compliance Officer Securities Transfer William Speirs May 22, 2008 Association of Canada President Copies of the original comment letters are available for review at the following websites: • www.osc.gov.on.ca
2 Summary of comments Summary of comment CSA response A. General comments Adoption of a national policy relating to One commenter was generally supportive We thank the commenters for their cease trade orders for continuous of the proposed adoption of a consistent support. disclosure defaults national policy with respect to cease trade orders for continuous disclosure defaults. One commenter was generally in support of the policy and agreed that CTOs should be issued using mutual reliance principles. The commenter believed this will go a long way to harmonizing the treatment and administration of CTOs. This commenter also liked the concept of MCTOs which places responsibility and accountability on the management of an issuer while allowing investors to continue to trade. The other commenters did not express a view. Concerns with the CTO database One commenter, although generally We have not made any changes to the administered by the CSA supportive of the policy, expressed concern policy in response to this comment as the with the ability of the investment dealer comment is primarily focused on concerns community to play its customary with the CSA CTO database rather than gatekeeper role given certain perceived the policy. deficiencies with the existing CSA database for CTOs. However, CSA staff will consult with the commenter and other representatives of the The commenter noted that the database dealer community to consider lacks fields for certain information improvements to the CSA CTO database.
3 Summary of comment CSA response contained in certain CTOs including the names of persons restricted by the CTO, in the case of an MCTO. The commenter further noted that dealers are generally unable to block certain trading for issuers and individuals subject to CTOs, particularly where the issuer also trades on a foreign market, such as the U.S. OTC Bulletin Board market. The commenter also raised concerns relating to the integrity of the information in the CTO database. These concerns include the following: • In the CTO database, CUSIP numbers are not provided for all issuers. • CTO database names are not normalized, consistent or accurate. • Concerns relating to the manner in which information relating to MCTOs is entered into the database. The commenter provided some suggestions as to how the entering of this information into the database could be improved. B. Specific comments Section 3.2 Why do we issue cease trade One commenter requested that the We have not made any changes to the orders in response to a specified default? Commissions consider implementing a policy in response to this comment. system to allow investors who had
4 Summary of comment purchased securities prior to the imposition of the CTO to register securities during the period the cease trade is in effect. The commenter noted that, at this time, these transactions are rejected by the transfer agents to ensure there is no possibility of their contravening the CTO. This situation comes up often when requests for transfer come in via the mail from locations outside the city in which the issuer’s transfer agent is located. In these situations the seller has obtained payment and remains the “registered” holder while the purchaser is not able to register the securities in their name until the CTO is lifted. The other consideration is for investors to register securities prior to the record or effective date for an upcoming corporate event, assuming the CTO would not prevent the event or transaction from taking place. For example, a purchaser who is not able to register the securities may be left with having to claim their entitlement from the seller on an event such as a stock split. The commenter noted that some time ago securities legislation provided a mechanism whereby a transfer could be CSA response Where a bone fide sale has occurred (i.e., beneficial ownership has passed from the investor to a subsequent purchaser) prior to the imposition of a CTO, but the transfer has not been registered by the time of the imposition of a CTO, we believe it is acceptable for the transfer agent to proceed to register the transfer. We would generally not consider the act of a transfer agent processing a transfer request, made in good faith and not as part of a plan or scheme to evade requirements of securities legislation, as constituting a trade prohibited by the CTO, where there was reasonable evidence (such as a sworn affidavit) to support the conclusion that the trade had in fact occurred prior to the date of imposition of the CTO. However, the securities that are the subject of the transfer request may remain subject to the CTO depending on the terms of the CTO.
5 Summary of comment presented with an affidavit from the transferee/broker/beneficial owner; provided it was complete and properly executed, it would allow the transfer agent to process the transfer during the CTO. The commenter attached copies of these forms to this comment letter for information purposes. Section 4.2 Contents of application One commenter expressed concern that the issuance of a general CTO in response to a (Expectation that the application should be specified default – unless the issuer applies filed at least two weeks in advance of the in writing for an MCTO at least two weeks filing deadline) before a potential default – will result in an increased administrative burden for issuers and regulators and increased market disruptions from the greater incidence of general CTOs. The commenter believed that this aspect of proposed NP 12-203 would make the proposed application process under the policy substantially more onerous for issuers than under the current process described in OSC Policy 57-603 and in CSA Staff Notice 57-301. The commenter believed that, under the current regime, a general CTO would only be triggered by a continuing default, following the imposition of an MCTO. CSA response The application process described in Part 4 of proposed NP 12-203 is generally similar to the current process described in OSC Policy 57-603 and in CSA Staff Notice 57-301. In particular, both Part 3 of OSC Policy 57-603 and CSA Staff Notice 57-301 currently provide that an eligible issuer should contact its principal regulator at least two weeks before the filing deadline and request that an MCTO be issued rather than a general CTO. They also describe the necessary supporting materials that should be included with the request, including an affidavit identifying the persons to be named in the MCTO. Accordingly, we do not believe the application process described in proposed NP 12-203 would represent a substantial
6 Summary of comment The commenter indicated that they do not believe that it is typically the case that an issuer “will usually be able to determine that it will not comply with a specified requirement at least two weeks before its due date”. The commenter stated that, in their experience it is sometimes very difficult for an issuer to know even days in advance of a filing due date that a default will occur. Often, a failure to file on time is caused by the late identification of a problem with the issuer’s financial statements or other disclosure, or by delays in the completion of the audit process, the resolution of which requires input from third parties (including the issuer’s auditors and counsel). The commenter believed that the proposed NP 12-203 framework may lead issuers to file “precautionary” applications to avoid triggering a general CTO if there is any possibility of a delay in completing required filings. Such applications would result in a significant administrative burden for issuers and securities regulators. CSA response change from current practice or result in a greater incidence of general CTOs. In addition, it is not currently the general practice of the CSA to a) issue a cease trade order only after “a continuing default” or b) issue a general CTO only following the imposition of an MCTO. Regulators may issue general CTOs immediately following a default. We have considered the comment relating to situations in which an issuer will be unable to determine whether it can comply with a specified requirement at least two weeks before its due date. We acknowledge that there will be situations where an issuer, notwithstanding the exercise of reasonable diligence, will be unable to determine whether it can comply with a specified requirement at least two weeks before its due date. Accordingly, we have amended the policy to reflect the commenter’s concern. However, we believe that, in most cases, an issuer exercising reasonable diligence should be able to make this determination at least two weeks in advance of the deadline.
7 Summary of comment CSA response The Canadian securities regulators will In particular, requiring issuers to have consider all relevant facts and prepared a detailed remediation plan for circumstances in considering applications inclusion in the MCTO application two under the policy. If it is the case that an weeks before a potential default may be issuer could not, notwithstanding the problematic – given that, during this same exercise of reasonable diligence, make this period, management will no doubt be very determination at least two weeks before its busy trying to resolve outstanding issues in due date, the issuer should include a brief the hope of avoiding a default in the first explanation of the reasons for the delayed place. filing in its application. Issuers may also face challenging disclosure issues in making such “precautionary” applications, in determining whether the making of such an application is a material fact requiring a press release. Such a release may be premature if the application is being filed out of an abundance of caution – but could result in increased trading activity and a significant effect on the market price or value of the issuer's securities in anticipation of a default that never comes to pass. In light of these concerns with the two-week advance application requirement, the commenter suggested the following changes to proposed NP 12-203:
8 Summary of comment CSA response • Issuers should be required to notify the regulators and issue a default announcement immediately upon management having a reasonable expectation that a filing deadline will not be met, but in any case no later than the due date of the filing; • Upon a specified default, an MCTO should generally be issued for a two-week period, after which it would automatically be converted into a general CTO unless the issuer files an application to maintain the MCTO; and • The application to maintain the MCTO would contain the same information currently proposed in NP 12-203 for MCTO applications. The commenter believed that providing issuers with a short grace period to prepare the MCTO application and remediation plan after a default occurs and before a general CTO is issued represents an appropriate balance between the competing objectives of maintaining liquidity and preventing trading in issuers’ securities without sufficient secondary market disclosure.
9 Summary of comment CSA response Part 6 – Effect of a CTO issued by a One commenter RS explained its role as a We thank the commenter for the comment regulator in one jurisdiction on trading in regulation services provider, including its and believe this provides a useful summary another jurisdiction role in administering and enforcing trading of the operation of the commenter’s rules for the marketplaces it regulates. trading rules and the interaction of these (Interaction with the RS Universal Market rules with the CTO regime described in NP Integrity Rules (UMIR)) The commenter noted that, under its 12-203. trading rules, if a Commission issues a general CTO, no order for the purchase or We have revised Part 6 of proposed NP 12-sale of a security may be executed on a 203 in consultation with RS to clarify marketplace or over-the-counter market certain aspects of the policy that the governed by its trading rules. However, commenter believed were unclear. CSA the trading rules do not recognize the staff will continue to consult with RS to concept of an MCTO and RS would not address any ongoing concerns. impose a regulatory halt in connection with an MCTO. RS further noted that, under its rules, any order entered on a marketplace must contain a marker that identifies the order as being entered on behalf of an insider. However, RS does not have the capacity to further distil trading by insiders named in an MCTO as opposed to insiders generally. RS expressed concern that the current text of Part 6 may provide a misleading description of the effect of a CTO with respect to the ability to trade in a security that is listed or quoted on a marketplace
10 Summary of comment CSA response governed by its trading rules. RS suggested that language be added to make it clear that certain market participants may be subject to restrictions imposed by self-regulatory organizations including any exchange of which they are a member or a QTRS of which they are a user. RS further explained its process for imposing a regulatory halt as a result of the imposition of a general CTO. If a Commission issues a CTO with respect to an issuer whose securities are traded on a marketplace, RS imposes a regulatory halt on trading of those securities on all marketplaces for which RS serves as the regulation services provider. Such action is taken whether or not that commission that issued the CTO is the PR of the issuer. Once a regulatory halt has been imposed, no person subject to UMIR may trade those securities on a marketplace, over-the-counter or on a foreign organized regulated market. Notwithstanding that the PR or another securities commission rescinds its CTO, the regulatory halt imposed by RS on all marketplaces for which RS serves as the regulation services provider will continue until all CTOs have been rescinded. RS noted that Part 6 of the Policy
11 Summary of comment essentially provides warning when conducting a trade off-marketplace or on a foreign organized regulated market in subject to a CTO. RS wished to emphasize that, in fact, its trading rules preclude such trading in many circumstances and was concerned that the cautionary nature of this Part of the Policy may be interpreted as providing an “over-ride” prohibitions imposed by its trading rules. Sample Form of Consent One commenter noted that item #9 in the Appendix C proposed sample form of consent would prohibit individuals from trading in or acquiring an issuer’s securities until two full business days after the required filings are made or until further order of the principal regulator. The commenter presumed that the objective of this provision was to provide sufficient time for capital markets participants to review and react to new material information that may be disclosed in filings made to remedy a default before trading by insiders is permitted. The commenter felt that, while that CSA response a “yellow light” a security that is of the In certain jurisdictions, the current form of MCTO generally prohibits all trading in and all acquisitions of securities of the issuer until two business days following the receipt of all filings the issuer is required to make under applicable securities legislation. The reference to “two business days” in item 9 of the sample form of consent is intended to be consistent with this form. We generally agree with the commenter’s description of the objective of this provision and the appropriate analysis for determining when material information may be considered to have been “generally disclosed”. As part of an implementation strategy,
12 Summary of comment objective had merit, the provision was overly restrictive and inconsistent with the principles set out in National Policy 51- 201 Disclosure Standards (“NP 51-201”). NP 51-201 encourages issuers to adopt a case-by-case approach to determining when material information may be considered to have been “generally disclosed”. In the case of an MCTO being lifted, any new material information will be publicly filed on SEDAR and capital markets participants would have been made aware of its upcoming release through the issuer’s bi-weekly updates. In these circumstances, where information is being broadly disseminated to a ready and waiting market, and given today’s speed of information transmission through electronic means, a two business day holding period was unnecessary, as well as being unfairly restrictive for persons with no involvement in a particular default nor knowledge of material undisclosed information. CSA response CSA staff intend to review the forms of CTO and MCTO that are currently in use to determine whether they can be further harmonized. To the extent the current form of order is modified, we will accept corresponding modifications to the form of consent. We will also consider requests for a modification of this language on a case-by-case basis where the issuer is able to demonstrate that it is reasonable to consider information has been generally disclosed within a shorter time frame.
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