NEW CSA RULE FOR ISSUERS QUOTED IN THE U.S. OVER-THE-COUNTER MARKETS ADOPTED IN ALL PROVINCES AND TERRITORIES EXCEPT ONTARIO

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1 August 2012 Number 223 Non-Resident Investment Fund Managers Exempted from Registration Requirements... 3 CSA... 6 IIROC... 7 NEW CSA RULE FOR ISSUERS QUOTED IN THE U.S. OVER-THE-COUNTER MARKETS ADOPTED IN ALL PROVINCES AND TERRITORIES EXCEPT ONTARIO Daniel N. Bloch, Rebecca A. Kacaba and Brian Chung, Aird & Berlis LLP Daniel Bloch is a partner and member of the firm s Corporate Finance Group and Mining Group, and may be contacted at or dbloch@airdberlis.com. Rebecca Kacaba is an associate with Aird & Berlis and a member of the firm s Corporate Finance Group and Mining Group, and may be contacted at or rkacaba@airdberlis.com. Brian Chung is currently a summer student at Aird & Berlis LLP. This article first appeared in the August 2012 issue of the Aird & Berlis Securities Law Bulletin, available at and is reproduced with permission. Aird & Berlis LLP. Multilateral Instrument Issuers Quoted in the U.S. Over-the-Counter Markets (the Rule ) came into force on July 31, 2012 in all Canadian provinces and territories except Ontario. The Rule aims, by regulating disclosure requirements, to address damages to the reputation of Canada s capital markets by U.S. over-the-counter ( OTC ) companies who ICE Futures Canada... 7 have historically traded their shares on the Canadian marketplace without adequate public disclosure. In British Columbia a less restrictive form of the Rule, B.C. Instrument ( ), has been in force since The Canadian Securities Administrators ( CSA ) have found that since 2008 and the adoption of in British Columbia, Montreal Exchange... 8 certain OTC issuers had been migrating to other Canadian jurisdictions and thus a need had developed for a more widespread rule. Provincial Updates 8 The Ontario Securities Commission is not adopting the Rule, stating that it has investigated the issue and will continue to monitor for any evidence of abusive activity Recent Cases Misrepresentations in News Releases being conducted in Ontario in order to determine whether it may become necessary to propose amendments to the Securities Act (Ontario). 1 Who is Caught by the Rule? Action for Misrepresentation in the Secondary Market Time-Barred 12 Canadian jurisdiction: The Rule will apply to any issuer ( OTC Reporting Issuers ) whose: (1) securities have been assigned a ticker symbol by the Financial Industry Regulatory Authority (FIRA) in the U.S. (the TSD being the ticker symbol date); 2 and (2) who meets one or more of the following three tests for a significant connection to a (a) business is directed or administered from the local Canadian jurisdiction; 3 (b) promotional activities are carried out from the local Canadian jurisdiction; 4 1

2 CANADIAN SECURITIES LAW NEWS 2 (c) before the issuer was assigned a ticker-symbol on a U.S. OTC market, the issuer distributed a security to a person resident in the local Canadian jurisdiction. The Rule will not apply to issuers that are listed on certain larger designated exchanges (including but not limited to, the TSX, TSXV, Alpha Exchange Inc., the CNSX or the NASDAQ) as such exchanges impose reporting requirements on issuers. Resale Restrictions and Hold Periods The Rule contains restrictions on the sale of securities as follows: (1) Securities purchased before July 31, 2012, and sold before TSD, any private placement exemption July 31, 2012 (2) Securities purchased after July 31, 2012, before TSD and sold before TSD, any private placement exemption TSD (3) Securities purchased before TSD and sold after TSD may only be sold pursuant to the conditions listed in s.11 of the Rule, including: (i) no trade unless Take Over Bid ( TOB ) or amalgamation; (ii) legend required; (iii) and can only be sold through a Cdnregistered inv. dealer who executes the sale on the OTC. (4) Securities purchased after TSD may only be sold pursuant to the conditions listed in s. 13 of the Rule including: (i) no trade unless TOB or amalgamation; (ii) legend required; (iii) no trade for 4 months; (iv) limitation on sale not to exceed 5% of outstanding securities; (v) no market prep or extraordinary commission; and (vi) can only sell through a Cdn-registered inv. dealer who executes the sale on the OTC. No other Canadian hold period legends will apply. The Rule prevents the use of the trade exemption for a private agreement in the face of a take-over bid. 5 It also limits the amount of securities that can be issued for services. Disclosure Requirements OTC Reporting Issuers will be required to meet the same periodic disclosure requirements as domestic venture issuers under National Instrument Continuous Disclosure Obligations. These requirements include filing an annual information form ( AIF ), management s discussion and analysis and audited financial statements. The Rule also imposes timely disclosure requirements and obligations to file public disclosure on SEDAR. If an OTC Reporting Issuer (an SEC filer ) completes filings with the Securities and Exchange Commission (the SEC ), the OTC Reporting Issuer will be able to comply with the Rule by using documents filed with the SEC. Other than the requirement to file an AIF, OTC Reporting Issuers will be treated as venture issuers, meaning they will have the longer filing deadlines for annual and interim financial statements and business acquisition reports than nonventure issuers. The Rule will, however, impose filing requirements in addition to standard venture issuer requirements, including insider reports for insiders, 6 personal information forms for directors, officers, promoters or control persons, and in certain circumstances, the most recent registration statement filed with the SEC. Except in British Columbia, issuers who are not SEC filers are granted a transition period in order to allow them time to engage auditors and prepare financial statements; the first AIF and financial statements required to be filed will be for periods beginning after January 1, The CSA does not expect compliance will be significantly costly for SEC filers as many of the SEC forms will be eligible for filing in Canada. It will be more costly for non-sec filers who do not yet have audited financial statements and for oil and gas companies who will need to begin to comply with National Instrument Standards of Disclosure for Oil and Gas Activities or, in the case of mining companies, National Instrument Standards of Disclosure for Mineral Projects. Exiting the Regime After being an OTC Reporting Issuer for at least one year, an OTC Reporting Issuer can apply to cease to be an OTC Reporting Issuer if:

3 CANADIAN SECURITIES LAW NEWS 3 (a) its business is not and has not been for at least one year directed or administered in or from a Canadian jurisdiction, at least one year has passed since the last date of promotional activities in Canada, and more than one year has passed since the TSD; (b) a class of securities of the OTC Reporting Issuer becomes listed or quoted on a designated exchange (and it is thus subject to that exchange s reporting requirements); or (c) if an order is made by the securities regulatory authority in the Canadian jurisdiction that it is no longer a reporting issuer in that Canadian jurisdiction. In Quebec, an application will need to be made to the securities regulatory authority for a decision that the issuer is no longer an OTC Reporting Issuer. Implications for the Canadian Capital Markets Recently, Canadian exchanges have become more inquisitive when dealing with OTC-based companies. The Rule, which represents one of the broadest reaches we have seen by the CSA to non-canadian domiciled issuers, adds virtually consolidated commission support to this sentiment and signals a palpably more aggressive position may follow in the future. Oftentimes issuers may find themselves traded on an OTC Market without their own application due to the request of a U.S. broker/dealer. It is thus possible that issuers who have engaged in some kind of limited activity in Canada could inadvertently find themselves subject to a new public reporting scheme which requires fairly substantial labour time and cost. These compliance costs will have to be considered by US companies contemplating entrance to the Canadian markets outside of Ontario. The CSA has indicated that where the application of the Rule would be unjust an exemption will be considered. For example, if an issuer has been forced to drop off a qualifying exchange such as the NASDAQ, or if an issuer is already subject to another continuous disclosure regime that is not caught by the Rule. It remains to be seen if the enforcement of the Rule will result in a chilling effect on the marketing of U.S. private placements in Canada. This article is provided for informational purposes only and does not constitute legal advice or an opinion. If you would like to discuss the information provided in this article, please contact Daniel N. Bloch or Rebecca A. Kacaba. Notes: 1 Canadian Securities Administrators, Notice, Multilateral Instrument Issuers Quoted in the U.S. Over-the-Counter Markets (10 May 2012) at 9. 2 A ticker symbol can be assigned by FIRA when an issuer is quoted on any U.S. OTC market (including the OTC Bulletin Board) or grey markets (unofficial broker trading channels). 3 An OTC issuer s business will be considered to be directed or administered from a jurisdiction if: (a) its head office, or another office where executive functions take place is located in that jurisdiction; (b) some or all of its directors are located in that jurisdiction; or (c) any director, officer, consultant or other person who carries out executive functions for the issuer does so from an office in that jurisdiction, or is resident in that jurisdiction. It will not include issuers who only have an asset (such as a mineral property or warehouse), sales personnel or an expert, in the jurisdiction. 4 promotional activities in a jurisdiction will include communications through an investment newsletter or other publication that promotes, or reasonably could be expected to promote, the purchase or sale of securities of the OTC issuer and will generally be considered to include providing information to potential investors who request information. This can include the employment of an individual or firm to issue communications through an investment newsletter or to provide information to potential investors or potential private placement purchasers. It does not include dissemination of information or the preparation of records in the ordinary course of business to promote the sale of products or services of the issuer and to raise public awareness of the issuer or activities performed to comply with another law or regulation. 5 Section 4.2 of Multilateral Instrument Take-Over Bids and Issuer Bids, private agreement exemption. 6 An insider of an OTC Reporting Issuer that is incorporated outside of Canada and is an SEC filer is exempted from insider reporting requirements if the insider files insider reports with the SEC under U.S. federal securities law. However, an insider of an OTC Reporting Issuer that is exempted from filing insider reports under U.S. federal securities law must file insider reports in Canada. CSA JURISDICTIONS EXEMPT NON-RESIDENT INVESTMENT FUND MANAGERS FROM REGISTRATION REQUIREMENTS Kathleen Jones-Lepidas, CCH Canadian Limited. CCH Canadian Limited. The Ontario Securities Commission, the Autorité des Marchés financiers (Quebec), and the Financial Services Regulation Division (Newfoundland and Labrador) plan to adopt an instrument relating to registration exemptions for non-resident

4 CANADIAN SECURITIES LAW NEWS 4 investment fund managers. Specifically, those jurisdictions will be implementing Multilateral Instrument , Registration Exemptions for Non-Resident Investment Fund Managers ( MI ), Companion Policy CP ( CP ) (collectively, the Instrument ), and two related forms. What is the Purpose of the Instrument? The Instrument was issued to provide registration exemptions for non-resident investment fund managers. Specifically, under MI , the investment fund manager registration requirement does not apply to a person or company acting as an investment fund manager of one or more investment funds if: (1) the investment fund manager does not have a place of business in the local jurisdiction and if one or more of the following conditions apply: (a) none of the investment funds has security holders who are resident in the local jurisdiction; and (b) the person or company and those investment funds have not, at any time after September 27, 2012, actively solicited residents in the local jurisdiction to purchase securities of the fund; (2) all of the securities of the investment funds distributed in the local jurisdiction were distributed under an exemption from the prospectus requirement to permitted clients, subject to certain additional requirements outlined in MI This last exemption applies only to an investment fund manager that does not have its head office or its principal place of business in Canada. What Are the Key Issues Related to the Instrument? The CSA has identified three key issues related to the Instrument: 1. Investor protection initiative: The CSA believes that the registration of non-resident investment fund managers that do not meet the conditions provided in the exemptions in MI is an important initiative that protects local investors: In the CSA s view, there is no policy rationale for treating investors unequally; an investor who has invested in an investment fund managed by a non-resident investment fund manager should not receive less protection than an investor who has invested in an investment fund managed by a domestic investment fund manager; The CSA also believes that all investment fund managers participating in Canadian markets should be subject to the same registration regime in circumstances where the investment funds managed by the investment fund manager have distributed their securities to residents of the local jurisdiction; The tests that apply to non-resident investment fund managers (as provided in the exemptions in MI ) are objective, bright-line tests with determinative factors, because the CSA believes that non-resident investment fund managers should be able to easily determine whether they are required to register or whether they can use one of the exemptions in MI ; and The CSA has a mandate to register investment fund managers, as prescribed by its legislation, irrespective of the location of the physical place of business of the person or company acting as an investment fund manager, and within the parameters of its jurisdictional authority. 2. Connecting the non-resident investment fund manager to the local jurisdiction and the availability of exemptions: The registration requirement for non-resident investment fund managers will depend on two conditions: (1) whether the manager acts as an investment fund manager, and (2) whether that manager is managing one or more investment funds that have distributed securities to residents of the local jurisdiction. If these two conditions are met, the CSA will determine that the registration requirement applies, subject to available exemptions in MI CP provides guidance for determining whether a person or company is acting as an investment fund manager.

5 CANADIAN SECURITIES LAW NEWS 5 If the person or company is acting as an investment fund manager, the second requirement must be met: Is the non-resident investment fund manager managing one or more investment funds that have distributed securities to residents in the local jurisdiction? It is the fact that there has been a distribution to security holders in the local jurisdiction, not how the distribution was carried out, that connects the non-resident investment fund manager to the jurisdiction. Investors in investment funds managed by non-resident investment fund managers face the same risks as investors who invest in local investment funds. In general, a non-resident investment fund manager will not be required to register if: (1) the investment fund no longer has security holders in the local jurisdiction, notwithstanding a distribution of securities in the past; (2) the investment fund has security holders in the local jurisdiction but has not actively solicited residents in the local jurisdiction after September 27, 2012; or (3) the security holders are permitted clients that meet the requirements of section 4 of MI Notice and information requirements: Specific notices are required by MI in connection with the exemption based on permitted clients: notice of reliance on the exemption to the securities regulatory authority, including disclosure of the assets under management attributable to investors in the local jurisdiction; notice of regulatory action to the securities regulatory authority concerning disciplinary history, settlement agreements, and ongoing investigations of the investment fund manager; notice to permitted clients indicating that the investment fund manager is not registered in the local jurisdiction, along with certain prescribed disclosure; and starting March 31, 2013, notice to investors from registered international investment fund managers that includes, in substance, the disclosure required pursuant to section 14.5 of National Instrument , Registration Requirements, Exemptions and Ongoing Registrant Obligations ( NI ). What About Other CSA Jurisdictions? The other CSA jurisdictions British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, Nova Scotia, New Brunswick, Northwest Territories, Nunavut, and Yukon have taken an alternative approach to the registration of investment fund managers. These jurisdictions will be adopting Multilateral Policy , Registration Requirement for Investment Fund Managers ( MP ). MP provides guidance about the general principles that apply in determining whether a person is required to register as an investment fund manager in the MP jurisdictions, including guidance on the types of activities that investment fund managers usually conduct. Under MP , an investment fund manager is required to register in a jurisdiction if: it carries on the activities of an investment fund manager in that jurisdiction (these activities are specified in MP ); or it directs or manages the business, operations, or affairs of an investment fund from a physical place of business in that jurisdiction or its head office is in that jurisdiction. If the investment fund manager does not have a physical place of business or head office in a jurisdiction, the manager will need to register if it carries on the activities of an investment fund manager in that jurisdiction. In determining whether registration is required, the investment fund manager should consider what activities are taking place in the jurisdiction. However, no single function or activity would be determinative in assessing whether registration is required; specifically, the presence of security holders and the solicitation of investors would not automatically require an investment fund manager to register in a jurisdiction. Are There Any Transitional Provisions? CSA members issued parallel orders, dated July 5, 2012, to extend the transition provisions in sections 16.5 and 16.6 of NI As a result, domestic non-resident investment fund managers and international non-resident investment fund managers will have a three-month extension from September 28, 2012 to December 31, 2012 to apply for registration. For further information, please refer to CSA Staff Notice , Omnibus/Blanket Orders Extending Certain

6 CANADIAN SECURITIES LAW NEWS 6 Transition Provisions Relating to the Investment Fund Manager Registration Requirement and the Obligation to Provide Dispute Resolution Services, which has been reproduced in Volume 1 of the Canadian Securities Law Reporter at When Will the Instrument Become Effective? Provided all of the necessary approvals are obtained, the Instrument is expected to come into force on September 28, MI , its related forms, and CP have been reproduced Volume 1 of the Canadian Securities Law Reporter at 3202 to 3202c; MP , which is also expected to come into force on September 28, 2012, has been reproduced in Volume 1 at CANADIAN SECURITIES ADMINISTRATORS CSA Replaces Staff Notice The CSA revised Staff Notice Applications for a Decision that an Issuer is not a Reporting Issuer on July 26, 2012, which provides information and guidance on coordinated review applications that may be made under National Policy Process for Exemptive Relief Applications in Multiple Jurisdictions, for a decision that an issuer is not a reporting issuer (a decision ). Among other things, this Notice covers how an issuer can apply for a decision under a simplified procedure if it meets certain conditions; how an issuer can apply for a decision if it is not eligible to use the simplified procedure; and how an issuer can describe the decision it wants in a way that addresses legislative differences between jurisdictions. For further information, please refer to CSA Staff Notice , which has been reproduced in Volume 1 of the Canadian Securities Law Reporter at New Class of IIROC Member Proposed The CSA issued Staff Notice Follow-up to Broker Dealer Registration in the Exempt Market Dealer Category on July 12, 2012, to introduce an Investment Industry Regulatory Organization of Canada ( IIROC ) Concept Paper published as IIROC Notice (the IIROC proposal ). The IIROC proposal introduces a new class of IIROC Member, called a Restricted Dealer Member, which is intended to migrate firms currently registered as exempt market dealers ( EMDs ) or restricted dealers carrying out brokerage activities to IIROC membership. Based on this proposal, firms would surrender their EMD or restricted dealer registration and apply for investment dealer registration as well as seek IIROC membership. For further information, please refer to CSA Staff Notice , which has been reproduced in Volume 1 of the Canadian Securities Law Reporter at Ontario, Quebec, and Newfoundland and Labrador To Provide Exemptions for Non-Resident Investment Fund Managers The Ontario and Quebec Securities Commissions have issued Multilateral Instrument Registration Exemptions for Non-Resident Investment Fund Managers, and Companion Policy CP. The Multilateral Instrument and the Companion Policy, which will apply in Ontario, Quebec, and Newfoundland and Labrador, relate to registration exemptions for persons or companies acting as investment fund managers for one or more investment funds and that: do not have their head office or their principal place of business in a jurisdiction of Canada (international investment fund managers); and do not have a place of business in the local jurisdiction (domestic non-resident investment fund managers). The Multilateral Instrument, Forms, and Companion Policy, which will come into force on September 28, 2012, have been reproduced in Volume 1 of the Canadian Securities Law Reporter starting at 3202.

7 CANADIAN SECURITIES LAW NEWS 7 CSA Issues Notice To Provide Continuous Disclosure Guidance The CSA s continuous disclosure ( CD ) review program is designed to identify material disclosure deficiencies that affect the reliability and accuracy of an issuer s disclosure record, and has two fundamental objectives: education and compliance. The CSA issued Notice Continuous Disclosure Review Program Activities for the fiscal year ended March 31, 2012 on July 19, 2012 to: help issuers understand and comply with their obligations; summarize the results of the CD review program for the fiscal year ended March 31, 2012 (fiscal 2012); and provide examples of areas of common deficiencies. For further information, please refer to CSA Staff Notice , which has been reproduced in Volume 1 of the Canadian Securities Law Reporter at Comments Requested on Proposed Document The CSA recently published proposed amendments relating to National Instrument Designated Rating Organizations, Related Policies and Consequential Amendments ( NI ) (the DRO Consequential Amendments ). Many investors and intermediaries rely on credit ratings when making investment decisions about debt securities and other structured products. Canadian securities legislation also includes a number of references to credit ratings. Some of these provisions permit different treatment based on the credit rating. For example, highly rated short-term debt securities (1) can be distributed under an exemption from registration and prospectus requirements; (2) can be distributed by short-form prospectus; (3) are qualified securities for mutual funds; and (4) are eligible investments for money-market funds. The DRO Consequential Amendments will replace these existing references to approved rating organization, and approved credit rating organization with designated rating organization. Similarly, the terms approved rating and approved credit rating will be replaced with designated rating and amended to include a rating provided by a DRO affiliate, another defined term in NI For further information, please refer to the July 26, 2012 CSA Notice and Request for Comments in the OSC Bulletin. INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA Implementation of the Enhanced Suitability Assessment Requirements Extended The IIROC issued, on July 19, 2012, a notice concerning the extension of implementation of the enhanced suitability assessment requirements prescribed by Dealer Member Rule The notice has been incorporated into Volume 1 of the Canadian Stock Exchanges Manual starting at ICE FUTURES CANADA ICE Manual Updated The ICE Rules and Annex 8C have been updated. The amendments have been incorporated into Volume 1 of the Canadian Stock Exchanges Manual starting at

8 CANADIAN SECURITIES LAW NEWS 8 MONTREAL EXCHANGE List of Fees Updated The amendments to the List of Fees have been incorporated in Volume 2 of the Canadian Stock Exchanges Manual at Rule Four Updated The amendments to Rule Four have been incorporated in Volume 2 of the Canadian Stock Exchanges Manual at PROVINCIAL UPDATES Alberta Blanket Orders Added The Alberta Securities Commission has added Blanket Orders Extension of Transitional Relief from Investment Fund Manager Registration Requirement Prescribed by Sections 16.5 and 16.6 of NI and Extension of Transitional Relief from the Requirement to Provide Dispute Resolution Services Prescribed by Section of NI Blanket Order extends the temporary exemptions provided in sections 16.5 and 16.6 of National Instrument Registration Requirements, Exemptions and Ongoing Registrant Obligations ( NI ) to give investment fund managers affected by Multilateral Policy Registration Requirement for Investment Fund Managers ( MP ) until December 31, 2012 to apply for registration in that category. Blanket Order extends the temporary relief provided in section of NI until the earlier of September 28, 2014 and the coming into effect of any amendments to section of NI British Columbia BC Notices Added BC Notices 2012/15, 2012/16, and 2012/17 have been added. BC Notice 2012/15 provides advance notice of the adoption of MP and amendments to Companion Policy CP Registration Requirements, Exemptions and Ongoing Registrant Obligations that will take effect on September 28, In order to modernize marketplace rules, BC Notice 2012/16 announces the adoption, effective July 6, 2012, of amendments to National Instrument Marketplace Operation and Forms F1, F2, and F5. BC Notice 2012/15 also amends Multilateral Instrument Passport System ( MI ), National Instrument Trading Rules ( NI ), and repeals and substitutes Form F3 of National Instrument Marketplace Operation, the latter with effect from December 31, BC Notice 2012/17 announces the issuance of several commission recognition orders and related instruments relating to the TSX Venture Exchange, the Canadian Depository for Securities Limited, the Canadian Derivatives Clearing Corporation, and TSX Inc., in response to an application made by Maple Group Acquisition Corporation in connection with Maple s proposed acquisitions of the TMX Group Inc. and other entities.

9 CANADIAN SECURITIES LAW NEWS 9 Nova Scotia Blanket Order Provides Exemptions for OTC Issuers Blanket Order In the Matter of Exemptions from Multilateral Instrument Issuers Quoted in the U.S. Over-the-Counter Markets, orders that over-the-counter issuers are exempt from the provisions of MI subject to certain conditions, with effect from July 31, Blanket Order will be reproduced in Volume 3 of the Canadian Securities Law Reporter in a future report. Blanket Orders Provide Transitional Relief from Provisions of National Instrument Blanket Order In the Matter of Transitional Relief from the Requirement to Register as an Investment Fund Manager extends, with effect from September 28, 2012, the temporary exemptions from the investment fund manager registration requirements found in section 16.5 of NI Investment fund managers affected by the new MP will now have until December 31, 2012 to apply for registration. Blanket Order In the Matter of Transitional Relief from the Requirement to Provide Dispute Resolution Services Prescribed by Section of NI , orders that the exemption to the requirement that registered firms provide independent dispute resolution or mediation services to resolve client complaints under section of NI be extended until September 28, 2014, or until revisions to section of NI come into force. These Blanket Orders have been reproduced in Volume 3 of the Canadian Securities Law Reporter at h and i, respectively. National Instrument Adopted Rule Electronic Trading and National Instrument Electronic Trading and Companion Policy CP Electronic Trading ( Rule ) approves NI and makes it a rule of the Commission and issues its Companion Policy as a policy statement of the Commission, with effect from March 1, Further to the adoption of Rule , the Commission has also made Rule Electronic Trading and Consequential Amendments to Multilateral Instrument Passport System, which makes consequential amendments to MI and adds NI to Appendix D of MI , with effect from March 1, Rule and the rule adopting the consequential amendments to MI have been reproduced in Volume 3 of the Canadian Securities Law Reporter at and , respectively. Ontario Policy Reformulation Table of Concordance Notice Updated OSC Staff Notice Policy Reformulation Table of Concordance and List of New Instruments, which updates the Policy Reformulation Table of Concordance, has been updated as of June 28, For further information, please refer to OSC Staff Notice , which has been reproduced in Volume 3A of the Canadian Securities Law Reporter at l. Applications for a Decision that an Issuer is Not a Reporting Issuer The OSC replaced Staff Notice Applications for a Decision that an Issuer is not a Reporting Issuer on July 26, 2012, which provides information and guidance on applications that may be made under section 1(10)(a)(ii) of the Ontario Securities Act for an order that an issuer is not a reporting issuer. For further information, please refer to OSC Staff Notice , which has been reproduced in Volume 3A of the Canadian Securities Law Reporter at Notice in Respect of Non-Resident Advisers Issued OSC Staff Notice (Commodity Futures Act) Non-Resident Advisers was issued on July 5, 2012, setting out how OSC staff interpret the application of the adviser registration requirement set out in section 22(1)(b) of the Ontario Commodity Futures Act with respect to non-resident investment funds that are sold to Ontario-based investors. For

10 CANADIAN SECURITIES LAW NEWS 10 further information, please refer to OSC Staff Notice , which has been reproduced in Volume 3A of the Canadian Securities Law Reporter at Report on Staff s Disclosure Review of Portfolio Holdings by Investment Funds The OSC recently issued Staff Notice , which reports the findings and recommendations of staff of the Investment Funds Branch of the Ontario Securities Commission arising from a targeted review of portfolio holdings and other related disclosure filed by investment funds. This notice supplements the guidance and interpretations provided in National Instrument Investment Fund Continuous Disclosure, National Instrument Mutual Fund Prospectus Disclosure, and Form F3 Contents of Fund Facts Document. For further information, please refer to OSC Staff Notice , which has been reproduced in Volume 3A of the Canadian Securities Law Reporter at Prince Edward Island Application and Filing Fees Updated S.P.E.I. 2012, c. 33 repeals and substitutes the Schedule to the PEI Securities Act, in force July 31, The new Schedule, which updates the fees payable for various applications and filings with the Commission, has been reproduced in Volume 4 of the Canadian Securities Law Reporter at et seq. Blanket Orders Provide Exemptions from Provisions of National Instrument Blanket Order Exemption from the Requirement to Register as an Investment Fund Manager orders that investment fund managers affected by the new MP will now have until December 31, 2012 to comply with the registration requirements found in section 16.5 of NI This is a three-month extension beyond the temporary exemption provided in section 16.6 of NI , which expires on September 28, Blanket Order Exemption from the Requirement to Provide Dispute Resolution Services Prescribed by Section of NI orders that the exemption to the requirement to provide independent dispute resolution or mediation services to resolve client complaints under section of NI be extended until September 28, 2014, or until revisions to section of NI come into force. Blanket Orders and have been reproduced in Volume 4 of the Canadian Securities Law Reporter at and , respectively. RECENT CASES Misrepresentations in News Releases of Mining Company British Columbia Securities Commission, June 26, 2012 Brookmount Explorations Inc. ( Brookmount ) was a Nevada company the securities of which were, during the relevant period, quoted on the U.S. OTC Bulletin Board and which made filings with the U.S. Securities and Exchange Commission (the SEC ). There was no evidence that Brookmount was a reporting issuer in British Columbia, although Brookmount operated solely from an office in Vancouver during the relevant period. Peter John Flueck ( Flueck ) was a director and President of Brookmount. Zafer Erick Sungur ( Sungur ) was a director and the Chief Operating Officer, Secretary, and Treasurer of Brookmount, and worked as the sole employee at the Vancouver office during the relevant period. In January 2005, Flueck vended a Peruvian mining property owned by him, the Mercedes 100 Project ( Mercedes ), into Brookmount for $20,000 in cash and five million Brookmount shares, of which Sungur received 1.25 million shares. According to both Flueck and Sungur, Sungur was responsible for disseminating Brookmount s news releases from its Vancouver office. Flueck stated that the drafting of those news releases was a joint effort between him and Sungur, that Brookmount s auditors prepared Brookmount s financial statements and its filings with the SEC, that Sungur gave the auditors the content about Brookmount s mining properties that appeared in its financial statements and SEC filings, and that Sungur always read Brookmount s news releases before they were disseminated.

11 CANADIAN SECURITIES LAW NEWS 11 Sungar stated that he was always aware of when a news release was going to be disseminated and was knowledgeable about its content. Mercedes was key to Brookmount s business. Between 1997 and 2005, Brookmount had four reports (the Reports ) relating to Mercedes, some of which referred to an earlier report on the property that had concluded that Mercedes had no certifiable reserves (the Coates Report ). The first report, dated September 1997 (the Mann Report ), noted the Coates Report s conclusion and determined reserve estimates that were significantly lower than those in the Coates Report. The second report, dated March 2004 (the Sterling Report ), contained economic projections based on the reserves in the Mann Report. The third report, dated March 2004 (the Salazar Report ), was a geological report that had been commissioned to comply with National Instrument Standards of Disclosure for Mineral Projects ( NI ) and stated that neither the unspecified possible reserves in the Mann Report nor the mineral estimates in the Coates Report complied with the Canadian Institute of Mining standards or with the requirements of NI The fourth report, dated 2005 (the Foster Report ), was a business plan and production report that contained highly promotional statements and suggested that the Coates Report s predictions of possible reserves were understated while stating that the total reserves of Mercedes and the longevity of the mine were unknown. In February 2005 and February 2006, Brookmount made two filings with the SEC in which it stated that Mercedes had no known reserves (the SEC Filings ). Nevertheless, between February 2005 and June 2007, Brookmount issued 10 promotional news releases relating to Mercedes (the News Releases ), none of which mentioned that the Mercedes property had no certifiable reserves nor the Salazar Report s assessment of the estimates in the Coates Report and the Mann Report, nor reconciled the statements made in the News Releases with the SEC Filings. Further, various News Releases that were based on the Foster Report did not disclose how conclusions had been reached in that report. Flueck admitted that the more negative Salazar Report had not been used as a reference for the News Releases as Flueck wanted to present the best possible picture. A cease-trade order was issued in June 2007 by the executive director of the B.C. Securities Commission (the Commission ), although both Flueck and Sungur traded in Brookmount shares in July and August In late 2007 and early 2008, Flueck and Sungur attended compelled interviews with Commission staff. On February 4, 2011, the executive director of the Commission issued a notice of hearing against Brookmount, Flueck, and Sungur alleging that, from February 2005 to June 2007, they had committed a number of contraventions against the Act and NI in connection with the News Releases. The Commission found Brookfield, Flueck, and Sungur to be in breach of the B.C. Securities Act (the Act ) and NI , and that Flueck and Sungur breached the June 2007 cease-trade order against Brookmount securities. The Commission considered (1) whether Brookmount made misrepresentations contrary to section 50(1)(d) of the Act when it issued the News Releases; (2) whether Brookmount contravened NI when it issued the News Releases by not complying with the technical requirements of that instrument; (3) whether Flueck and Sungur authorized, permitted, or acquiesced in Brookmount s contraventions and, accordingly, committed the same contraventions of the Act; and (4) whether the Commission had jurisdiction to consider the allegations. The Commission also considered Sungur s role in the company because this was relevant both to the respondents arguments on jurisdiction and to Sungur s arguments about his liability for Brookmount s contraventions. The Commission found that Sungur was not merely an officer of Brookmount by title but a de facto officer whose responsibilities included executive functions consistent with his titles, and that he and Flueck were Brookmount s only directors during the relevant period. Among other things, the Commission found that Sungur had a significant role in reviewing Brookmount s News Releases for their substantive content, that he had authority over the company s auditors, and that he had performed most of the executive functions for Brookmount. To the first issue, the Commission found that Brookmount contravened the Act when it issued the News Releases containing misrepresentations and, in doing so, was engaging in investor relations activities. The misrepresentations were untrue statements of material facts resulting from the omission of information from both the Reports and the SEC Filings which would have prevented the statements from being false or misleading. The Commission noted that the Mercedes property was Brookmount s most significant property, and information about its reserves, mineralization, project revenue, and mine life were all facts that would reasonably be expected to have a significant effect on the market price of Brookmount s securities. To the second issue, the Commission found that Brookmount had contravened NI when it issued News Releases that did not conform to the requirements of that instrument, particularly in

12 CANADIAN SECURITIES LAW NEWS 12 relation to technical reporting. Had Brookmount complied with the requirements of NI , the misrepresentations in the News Releases could not have occurred. To the third issue, the Commission concluded that Flueck and Sungur contravened both the Act and NI and that Sungur authorized, permitted, and acquiesced in Brookmount s contraventions of the Act and of NI In the Commission s opinion, Flueck, who drafted the News Releases, knew that they were false, and clearly authorized, permitted, and acquiesced in Brookmount s contravention of the Act and NI As for Sungur, the Commission noted that he was a director of Brookmount and concluded that his issuance of the News Releases when he ought to have known that they contained misrepresentations amounted to implicit authorization. To the last issue, the Commission referred to Torudag, 2009 BCSECCOM 9, and concluded that the Commission has jurisdiction based on the respondents real and substantial connection to British Columbia: Brookmount s Vancouver office was its only office, Sungur carried out his executive responsibilities at that office, and Brookmount issued the News Releases in British Columbia. Finally, the Commission considered whether Flueck and Sungur breached the June 2007 cease-trade order against shares of Brookmount when they sold Brookmount shares in July 2007, and found that they had, based on evidence including trading records confirming sales of the shares. Re Brookmount Explorations Inc., 2012 CSLR Action for Misrepresentation in the Secondary Market Time-Barred Ontario Superior Court of Justice, July 3, 2012 Howard Green and Anne Bell (the Plaintiffs ) were two shareholders of the Canadian Imperial Bank of Commerce ( CIBC ). Gerald McCaughey ( McCaughey ) was CIBC s President and Chief Executive Officer; Tom Woods ( Woods ) was CIBC s Chief Financial Officer; Brian G. Shaw ( Shaw ) and Ken Kilgour ( Kilgour ) were both Senior Executive Vice-Presidents at CIBC, with Shaw being responsible for strategy and market performance, and Kilgour also being the Chief Risk Officer (CIBC, McCaughey, Woods, Shaw, and Kilgour together, the Defendants ). The Plaintiffs sought leave under section of the Ontario Securities Act (the Act ) to commence an action against the Defendants, alleging that CIBC had made misrepresentations in the secondary market through its required reportings (quarterly financial statements and Management Discussion and Analysis) and voluntary disclosures (press releases, earnings conference calls, investor presentations, and frequently asked questions posted on CIBC s website) in relation to its exposure to the U.S. residential mortgage market ( USRMM ). The Plaintiffs also sought to have the action certified as a class action pursuant to section 5 of the Ontario Class Proceedings Act, 1992 ( CPA ). The Plaintiffs claimed that, from May 31, 2007 to February 28, 2008 (the Class Period ), CIBC misrepresented its financial position in its public disclosures by failing to make its full exposure to the USRMM known and by failing to write down its positions, thereby overstating its income. The CIBC portfolios relevant to the proposed action, both of which were sensitive to the USRMM, were (1) CIBC s direct exposure or unhedged position portfolio, composed of bonds secured by U.S. residential mortgages, including subprime mortgages; and (2) CIBC s indirect exposure or hedged portfolio, which was acquired as a result of CIBC s activities as a financial intermediary, insuring the positions of others who were exposed to risk as a result of their ownership of mortgage-backed securities. Beginning in May 2006, there had been signs that the housing market in the United States was levelling or cooling off, which impacted the health of the subprime mortgage market. In its quarterly report for the second quarter of 2007, CIBC made no references to its investments that were sensitive to the USRMM. During a subsequent earnings conference, Shaw stated that CIBC s exposure to the U.S. subprime mortgage market was not a major risk. The subprime market continued to decline, with a downgrading of residential mortgage-backed securities and the failure of two large subprime hedge funds in the United States. Media reported that CIBC s exposure to the subprime market was as much as US$2.6 billion. CIBC issued a response through a news release that its unhedged exposure was well under US$2.6 billion and that its securities were in the highest rated category; however, it did not disclose its hedged exposure. In the next quarterly report, CIBC disclosed its $1.7 billion unhedged position but did not mention its hedged position. During the accompanying earnings conference call, Kilgour stated that CIBC s position in subprime mortgages was not a major risk issue. The subprime mortgage market continued to deteriorate through late 2007 and early CIBC released its fourth quarter 2007 results and provided, for the first time, disaggregated disclosure of both the hedged and unhedged positions, the notional value of the former being $9.3 billion. As a result of a failure of one of CIBC s insurers in mid-december, CIBC made it known that it could possibly take a writedown of $2 billion, causing a

13 CANADIAN SECURITIES LAW NEWS 13 drop in its share price. In the first quarter of 2008, CIBC took writedowns of $2.85 billion on its hedged positions and $500 million on its unhedged portfolio. CIBC ultimately sustained losses of $9.3 billion due to its investments connected to the subprime mortgage market meltdown and, during the Class Period, the price of CIBC shares declined by 37 per cent. The Defendants position was that the disclosure made during the Class Period was appropriate and in compliance with disclosure requirements. The Defendants argued that it was reasonable to rely on the ratings given by the industry s credit rating agencies to support their view that its exposure in the USRMM was not risky and therefore did not require disclosure, and they could not have foreseen the collapse of the subprime mortgage market. The Defendants additionally argued that the action had no possibility of success, as leave to pursue the claim had not been obtained within the three-year limitation period provided in section of the Act, in reliance on the decision in Sharma v. Timminco Limited, 2012 ONCA 107, 109 O.R. (3d) 569 ( Timminco ) (see 2012 CSLR ). The action was dismissed. The Court began by discussing a reporting issuer s continuous disclosure requirements under Part XVIII of the Act to provide regular disclosure of the financials and annual reports as outlined in sections 77 and 78, and to make timely disclosure of substantial business developments as they occur via news releases as stated in section 75(1). The Court noted, however, that not every change needs to be reported an issuer is not obligated to provide a running commentary on the company s progress ; instead, every issuer must determine what information is material; that is, what information would influence a reasonable investor s decision of whether to buy, sell, or hold securities in the issuer. The Court then outlined the test for when leave would be granted to pursue an action for misrepresentation in the secondary market, which requires that a plaintiff provide evidence to satisfy the court that the action is being brought in good faith and there is a reasonable possibility of success. The Court noted that, in Silver v. Imax Corp. (2009), 66 BLR (4th) 222, [2009] O.J. No (SCJ) ( Silver ), the Court opined that good faith meant that the plaintiff was not using the action for oblique or collateral purposes, and that the reasonable possibility of success threshold was meant to screen out strike suits. The Court in Silver also noted that the threshold was a relatively low threshold but more than a de minimus possibility of success. In the present case, the Court found that the good faith test had been met: the Plaintiffs brought the action to recover losses they had suffered during the Class Period as a result of the alleged misrepresentations. Turning to the possibility of success at trial, the Court reviewed expert testimony from experts engaged by the Plaintiffs and Defendants, as well as documentation relating to CIBC s internal processes and board meetings that occurred during the Class Period. The Court concluded that, apart from the statements made by CIBC at the May 31, 2007 earnings conference, there was no reasonable possibility that the Plaintiffs could successfully establish misrepresentations in a number of the non-core documents and releases issued by CIBC. However, with respect to the core documents, the Court held that there was a reasonable possibility that a trial judge would find that CIBC s failure to disclose its significant concentration of credit risk was due to its failure to appreciate the nature of its risks associated with its position, which failure led to its overvaluation. In the Court s view, CIBC should have asked itself whether it was placing undue reliance on the ratings agencies when the subprime mortgage crisis was escalating, and it was reasonably possible that the Plaintiffs would be able to establish that CIBC s valuations and disclosures were flawed because CIBC and the individual Defendants had failed to acquire the knowledge and resources to make reasoned judgments. It was not enough for CIBC to say that it was in the company of other institutions in failing to see the warning signs and account and disclose such signs. Turning to the issue of the three-year limitation period, the Court expressed its regret that it was bound by the Ontario Court of Appeal decision in Timminco, where that Court held that section 28 of the CPA (which provides that a limitation period applicable to a cause of action is suspended in favour of a class member on the commencement of the class proceeding, and resumes running against the class member upon the occurrence of certain events) did not operate to suspend the three-year limitation period applicable to the statutory cause of action under section of the Act. The facts of Timminco were similar to the facts in the case at bar, where a plaintiff sought leave to pursue a class action for negligent misrepresentations made in the secondary market, but the impugned statements had occurred beyond the three-year limitation period. In the present case, the Court was unable to conclude that Timminco could be distinguished from the case before it, and there was nothing to establish that the Defendants had waived their right to rely on the limitation defence, nor was it improper for them to do so. The Court stated that, but for Timminco, it would have extended the limitation period through the special circumstances doctrine as, unlike in Timminco, the Plaintiffs had been diligently pursuing their action and extending it would not have done violence to the purpose of