Ms. Michal Pomotov, Legal Counsel Toronto Stock Exchange The Exchange Tower 130 King Street West Toronto, Ontario M5X 1J2 Email: requestforcomments@tsx.com Zafar Khan, Policy Counsel TSX Venture Exchange 650 West Georgia Street P.O. Box 11633 Vancouver, British Columbia V6B 4N9 E-mail: zafar.khan@tsx.com March 28, 2013 Re: Consultation Paper on Emerging Market Issuers (December 2012) and TSX Venture Exchange Appendix 2B - Listing of Emerging Market Issuers Dear Ms. Promontov and Mr. Khan, As the voice of Canada s mineral exploration community, the Prospectors and Developers Association of Canada (PDAC) takes an active interest in the regulatory environments that shape the ability of our member companies to raise the risk capital they depend upon. The PDAC has reviewed the joint Consultation Paper on Emerging Market Issuers (EMIs), as well as the draft TSX Venture Exchange Appendix 2B Listing of Emerging Market Issuers policy. We note that TSX and TSX Venture have not provided specifics outlining which incidents with Emerging Market Issuers have led to this proposed new policy for Emerging Market Issuers. If more information was provided on the frequency, severity and nature of infractions by Emerging Market Issuers, the comment process would be more fruitful.
We assume that the high profile Sino Forest case was a major stimulus in the introduction of this policy. We would point out that this is not a mining or exploration company and further would encourage the TSX and TSX Venture to closely examine whether each proposed new requirements would in fact have prevented this or other specific EMI incidents. Notwithstanding the absence of detailed examples of the risks that the new rules are intended to manage, the PDAC does agree with the view of the TSX and TSX Venture that Management and Corporate Governance are a major source of potential risks associated with listing Emerging Market Issuers. As described in the background paper, the risks often stem from management s lack of experience and familiarity with Canadian securities law requirements and stock exchange requirements, including corporate governance standards and practices, requirements associated with related party transactions, and inadequate compliance with continuous and timely disclosure requirements. That being said, in our view much of the additional documentation that would be required is an exercise in form over substance and is unlikely to address the potential risks identified by the TMX, while simultaneously raising costs for EMIs (see Annex One for a detailed response ). To specifically address the proposed TSX Venture Appendix 2B, we believe the increased requirements that would be applied to companies that the TSX Venture deems to be Emerging Market Issuers are too broad in scope, overly prescriptive, and expensive for issuers. For example, the proposed, significantly increased sponsorship requirements translate into additional layers of legal work that will add cost but are unlikely to identify fraud or address the problem of inexperienced management of Emerging Market Issuers. These new requirements would likely deter many foreign companies from considering participating in our markets. We are also concerned that these standards may be inappropriately applied to companies that do not have a higher level of risk but are captured due to the countries in which they operate, or due to other factors that allow TSX Venture discretionary application of the policy. Given our concerns, the PDAC would ask that an alternative risk management approach be considered, as outlined in this letter. 2
Alternative Approach to Manage Risks and Strengthen Competitiveness of Canadian Companies PDAC believes that a more effective way to address these issues both at TSX and TSXV is to set higher standards for the Board of these EMI s, and facilitate a Board Mentorship approach that would effectively address the risks identified by the TSX/TSXV while also strengthening the ability of the Canadian exploration industry to globalize. For both the TSX and the TSXV, we suggest the following requirements be put in place for EMIs: 1) a majority of their Board of Directors with previous Canadian or equivalent public company experience, at least two of which are resident in North America; 2) at least two independent directors; 3) an independent Chairman; and 4) an Audit Committee with all members having relevant financial or accounting experience, and the Chairman of the Audit Committee having previous Audit Committee experience with a Canadian listed company. We believe these Board requirements are important at the time of initial listing of an EMI, but furthermore, need to be met and enforced on an ongoing basis for an EMI to maintain its listing. We see the mentorship approach at the Board level to be an effective way to address directly and indirectly the potential risks identified by the Exchanges, such as compliance with disclosure and governance standards and practices, providing effective communication solutions, meeting Canadian financial reporting standards, ensuring adequacy of internal controls and qualifications of senior officers, and ensuring validity of title to principal operating assets and legal rights to conduct operations. Requiring an EMI to have significant Board level participants with relevant knowledge and experience with public companies is less costly and less prescriptive, allowing companies to more appropriately deal with their specific situational risks. EMIs may be resistant to adding independent directors as they will perceive this as giving control to people outside of their existing owners/management, but we believe this is a decision they will need to make if they choose to access capital through our Canadian investor base. We believe this Board 3
mentorship approach will lead to a better quality of company and will better address the risks associated with Emerging Market Issuers, far superior to requiring expensive third party documentation that is not focused on enhancing the knowledge or operating methodologies of foreign management teams that wish to list on TSX or TSX Venture. In addition to helping the TSX/TSXV to manage risks, the PDAC also sees additional benefits accruing from this Board level mentorship approach. For example, foreign listed companies often become orphaned in our market, having few if any connections to the Canadian investment community, or contacts with qualified and appropriate service providers. By requiring a Board with a majority of directors with Canadian or equivalent public company experience, the EMI will benefit from the established relationships in our markets. This also offers a win-win proposition as the pool of Directors that would sit on the Boards of EMIs would expand their knowledge and expertise with foreign jurisdictions. We see this as enhancing our Canadian mining industry as a whole. We appreciate that the TSX and TSX Venture are vigilant in identifying, monitoring, and assessing potential risks associated with market participants and from time to time have a need to adjust listing and continued listing requirements in an effort to address specific recurring problems. It is important in this task to carefully balance the potential investor safeguarding with the cost of compliance, and the impact of delaying the listing of good companies or driving them to alternative trading venues. In addition, well intentioned changes may create unforeseen obstacles to low-risk listing applicants or already listed companies. Canada has for many decades demonstrated global leadership in mining and exploration. An important contributor to this success has been the access to capital that has been facilitated by our Canadian Stock Exchanges and Securities Commissions through appropriate regulations and administration. Globalization is important to keep Canada economically relevant and we would urge the TMX to continue on its path to be increasingly global. We would point out that many of Canada s financial institutions, including TMX have successfully implemented marketing initiatives to attract foreign interest in our markets, both from investors and to attract foreign companies to list in Canada. Our rules have historically facilitated this with relatively few incidents and we do not see events or trends that would necessitate us to slam the door shut at this point in time. The introduction of prohibitive rules for Emerging Market Issuers is not an appropriate way of addressing potential risks that have been successfully controlled in the past. 4
In conclusion, we believe that TSX and, even more so, TSX Venture has sufficient policies in place to regulate EMIs without the need for a new, almost dual regulatory regime. We appreciate and support the need to identify high-risk EMIs and to consider effective means of ensuring investor protection in Canada. We hope you will consider our alternative proposal that creates an oversight by experienced directors that can provide mentorship to management of an EMI. This is a solution that is not cost prohibitive, yet provides what we see as a win-win situation for the continued globalization of the Canadian markets. At the very least, TSXV should reconsider the impact of the proposal to require additional documentation from third parties as contemplated in proposed Appendix 2B, and analyse the likelihood that this will in-fact address specific problems experienced with EMIs. PDAC appreciates the opportunity to comment on the proposed Emerging Market Issuer policy, on behalf of its membership. Respectfully submitted, Ross Gallinger Executive Director Prospectors and Developers Association of Canada Cc: Elaine Ellingham (President, Ellingham Consulting Ltd.) Barbara Hendrickson (Co-Chair, PDAC Securities Committee) Bruce McLeod (Co-Chair, PDAC Securities Committee) 5
Annex One: Detailed Response to Consultation Paper on Emerging Market Issuers Notwithstanding that the PDAC Securities Committee does not support the introduction by TSX Venture of Appendix 2B, as proposed, we do wish to respond to some of the questions posed by TSX and TSX Venture in the Consultation Paper and comment on specific aspects of Appendix 2B. Section 5. TSX Questions for Public Consultation 5.2 Definition of Emerging Market Issuer We are concerned that TSX may consider a company an EMI based on any one or more of the factors, some of which (such as jurisdiction of incorporation, or jurisdiction of the principal business operation and assets) would capture a very significant number of our Canadian exploration and mining companies. We believe that if a specific factor is used to identify EMIs it should be the Company s residency of mind and management, designed to capture only those with insufficient experience in the Canadian public markets or equivalent, where a risk of regulatory understanding and/or compliance is evident. We would like to see a provision that clearly exempts many of our long-standing international exploration and mining companies from being considered EMIs unless they are inexperienced in the Canadian or equivalent public markets. 5.2 (b) Although independent technical reports are a good base for due diligence on the asset, they alone are not indicative of the experience of the Board and management team in running public companies and as such, should not alone be a determinant to whether a company has the potential higher risk associated with EMIs. As essentially all exploration and mining companies are required to file independent NI 43-101 reports upon listing, this is not a means of identifying or exempting EMIs. 5.2 (c) We are satisfied with the TSX s excluded jurisdictions, but would suggest that South Africa may also be considered as they have public markets that operate with a similar regulatory framework with a high degree of knowledge of mining. 5.2 (d) We do not believe that the jurisdiction of a resource issuer s principal business operations and assets is an appropriate factor to be used alone to define an EMI. 6
The TSX statistics clearly show that a majority of their Canadian mining issuers have properties in foreign jurisdictions. Therefore, we believe that jurisdiction of principal business operations should be excluded as a factor for resource issuers. 5.3 Management and Corporate Governance (a) As per our comments on page one of this document, we believe that the most effective way of dealing with the potential risks associated with EMIs is through Board mentorship. Although we propose that the majority of directors for TSX Venture EMIs be required to have Canadian or equivalent public company experience, for TSX EMIs we would suggest that at least 2 directors have such qualifications, at least one of which should be independent. Again, these minimum Board requirements should be enforced on a continued listing basis and any resignations should require a submission to the TSX explaining the reason. We do not believe that these directors should be required to have experience in the principal business jurisdiction of the issuer, as this could make it quite difficult for an EMI to find director candidates with such qualifications. Directors generally have broad business knowledge and are capable of applying their knowledge and experience to new situations. We would suggest TSX inquire on what basis the director believes he/she will understand the business environment in the jurisdiction. (c) Yes we support TSX requiring an independent Chair for all EMIs. In cases where a significant security holder is also a senior officer of the EMI, we would suggest the TSX consider requiring the Board to have a majority of independent directors, at least 2 of which have previous Canadian or equivalent public company experience. 5.4 Financial Reporting (a) CFO. We believe that there should only be one standard for CFO s. Although the local business knowledge and experience is somewhat important, equally important is knowledge of reporting standards and regulatory requirements in Canada. As a result, we believe a CFO s credentials and experience must be satisfactory, but that local business knowledge should not be a specific requirement. 7
(b) Audit Committee. We would suggest that for companies that clearly meet the definitions of an EMI, that the Chair of the audit committee be required to have previous experience on an Audit Committee of an Issuer listed on a Canadian or equivalent market. We believe this to be more important than local business knowledge and experience. (c) Auditors. The TSX should ensure that the specific Audit team has demonstrated local business knowledge and experience. Additional disclosure should be required on the relevant qualifications and experience of the Audit team. 5.5 Internal Controls (a) TSX should be aware of the high cost of preparing and in particular auditing internal controls. Exploration companies should be exempt as there is little or no benefit in such an exercise. We appreciate that in certain circumstances an internal control report for producing mining issuers that are considered EMIs may be appropriate, but we would suggest that it be only on a discretionary basis when the business or company is considered high-risk. Where an audit of an internal control report is requested, it should be performed by the auditor (not the sponsor) and in either case they are very expensive and should not be required unless exceptional concerns are evident. 5.6 Related Party Transactions (a) We are of the view that adequate rules are in place to regulate related party transactions and that there should not be two standards. A single standard for all non-exempt issuers is appropriate. (b) Where the TSX has identified a high-risk EMI that also has a controlling security holder, it may be appropriate to classify them as non-exempt and thereby provide the higher level of transaction review. We do not support automatically classifying all EMI as non-exempt. 8
5.7 Non-Traditional Corporate/Capital Structure We believe all TSX issuers should be subject to the same rules and restrictions with respect to non-traditional corporate structures or capital structures. As investors would not be aware of whether they are buying securities of an EMI or otherwise, it is inappropriate to have differing standards. We support appropriate restrictions to protect securityholders, but most importantly the requirement for transparent disclosure of any unique aspects of an Issuer s corporate or capital structure and any associated risks. 5.8 Other Requirements (a) Sponsorship. (i) (iv)we do not believe there is significant benefit in disclosing whether a sponsorship was required or the name of the sponsor, nor in making these reports public. The impact on the cost could exceed any benefits gained. We believe that the sponsorship is to assist the TSX in its assessment and comfort with the applicant. Our view is that EMIs should be required to provide a sponsorship in all cases where there is an absence of a concurrent prospectus filing. However, in cases where a prospectus is filed, sponsorship should only be required if there are factors that indicate to the TSX that there are uncertainties or concerns that need to be addressed. The Canadian underwriter or agent signing the prospectus can be expected to conduct a level of due diligence that complies with industry standards. (v) TSX provides a detailed framework for sponsorship requirements and we believe this to be adequate. We are of the view that the current sponsorships are held to certain standards set by the various respective financial firms and that any action to enforce sponsorship procedures would cause additional the Issuer costs to spiral upward, without significant benefit to investors or other stakeholders. If, however, the Exchanges are aware of a number of instances where deficiencies in the sponsor s procedures have led to unacceptable market consequences, we would support a separate review that could result in additional controls. 9
(b) Ongoing Requirements (i) (ii) We view the application of additional ongoing requirements for EMI s over and above those for other listings inappropriate for the most part. We believe if the TSX ensures that an appropriate Board is maintained, then the Board will implement appropriate measures to ensure the financial statements and internal controls are in order, but far more cost effectively, to the benefit of all stakeholders. We do appreciate that in certain instances the TSX may, at its discretion, have reason to believe that a review of interim financial statement by the issuer s auditors or a review of internal control systems on an annual basis may be warranted. Costs. TSX fees have continued to escalate. We would argue that the original listing fees are more than adequate to compensate the TSX for the work conducted on the majority of companies, and like all businesses, some clients are more profitable than others. We are not comfortable with a business model whereby the discretionary application of higher hurdles for listing generates additional revenues for TSX. As a for-profit company, there would appear to be a conflict of interest in this scenario. We appreciate that TSX has not proposed the introduction of a new policy but appears to be addressing the various risks associated with EMIs within the context and discretion of existing policies, and we support this approach. 6. TSXV Questions For Public Consultation Notwithstanding the alternative proposal we presented earlier in this document, we will provide some feedback to the questions posed and to the proposed Appendix 2B. We would also direct TSXV to review our comments with respect to the TSX Questions. 6.2 Definition of Emerging Market Issuer We would make reference to our concern expressed on page one that our Canadian resource Issuers, that may appear international at the management and board level, and in many cases are exploring, developing or mining on properties in foreign 10
jurisdictions, may be captured by the EMI definition. We believe this could inappropriately result in significantly higher hurdles, longer timelines and greater costs for listing. We believe that resource issuers with a management team and Board with sufficient Canadian or equivalent public company experience should generally not be subject to these rules, regardless of the location of their projects, so long as their Board and management team meet certain standards. 6.3 Qualifications of Management and Corporate Governance Public Company Experience and Jurisdiction Experience - We fully support the concept that the best way to ensure EMIs comply with the regulations, reporting and disclosure as a Canadian public company is to ensure the Board and management team meet certain minimum requirements (see Alternate Proposal, page 2 of this document). However, we find the TSXV s proposed required credentials for each of the CEO, CFO and Board of Directors to be too prescriptive and confusing and could easily deter good EMI s from listing in Canada. Each company is unique and while we agree that an EMI must be able to demonstrate that, in aggregate, their Board and management team have adequate and relevant experience to comply with the regulations, reporting, and communications standards as a Canadian public company, we believe that how an Issuer satisfies this, needs to be flexible. TSXV should appreciate that it is neither easy nor necessarily beneficial for an issuer to find and appoint a new, appropriate and compatible director or replace an officer, specifically to meet TSXV requirements during the listing process. Our point being that the requirements should not be too prescriptive. We do fully support an EMI policy focused on minimum Board and management requirements. 6.3 (b) Audit Committee We support the proposed Audit Committee requirements as proposed for EMIs. We wish to comment on Appendix 2B, Section 4.2 (f) Independent Oversight of Related Party Transactions. We believe that TSXV has sufficient policies in place governing related party transactions. By signing the TSXV Listing Agreement the issuer agrees to comply with such policies. We do not see the requirement for additional internal written issuer policies to be of any benefit. These would most certainly be prepared by their external legal counsel and become a standard listing 11
application document. This adds cost with no benefit. We reiterate that our Alternate Proposal that increases the relevant experience level of the Board should provide TSXV with the additional comfort and be more effective. We wish to comment on Appendix 2B, Section 4.3 Background and Corporate Searches. We would point out that there is already a redundancy with background checks between the TSXV, Securities Commission, and Agent s Counsel. The internet now provides a quick and cost effective means of conducting a corporate search on an applicant. We would ask that the TSXV be sensitive to the cost and additional time of extended searches using consultants, and ensure that the extended searches be initiated only when warranted. 6.4 Qualification of the Auditors Please see our comments for TSX under 5.4 (c) above 6.5 Financial Reporting and Adequacy of Internal Controls We feel strongly that the stringent and costly requirements, as proposed, not be applied to exploration companies as they would not provide any tangible benefit to investors in exploration companies. We reviewed the EMI exemption for resource issuers but, should the Appendix 2B policy be adopted, we would request further clarity in the policy that exploration companies would normally be exempt, as the factors defining EMIs could too easily capture many of our exploration and mining companies. We believe that the TSXV needs to investigate the cost impact the proposed requirements, as our experience shows that an internal control review that includes an audit is very expensive. We assume that it is currently within TSXV s policies and discretionary powers to require an internal control report in instances where there are concerns with a high risk EMI applicant. We suggest that the existing policies have served the markets well and that there is not sufficient justification to introduce these new criteria to all EMI applicants. 6.6 Non-Traditional Corporate / Capital Structure 12
We would refer you to our comments to the TSX above under section 5.7 Legal Matters Relating to Title and Ability to Conduct Operations (Appendix 2B, 4.7) We believe that TSXV has sufficient rules in place and that there should not be differing standards for the verification of permits and title to operations in foreign jurisdictions. 6.7 Sponsorship Requirements We appreciate that sponsorship can provide the TSXV with additional comfort that appropriate due diligence was completed by a Canadian market participant. We support the requirement for EMIs to provide a sponsorship, except as may be determined by the Exchange at its discretion. We believe that this is consistent and already within the scope of the TSXV existing policies. The detailed requirements proposed for an EMI Sponsorship Report are excessive and appear to apply an all-encompassing approach. As a result, the preparation of these reports could be prohibitively expensive to an EMI. We would like to point out a specific aspect under 4.8 (b)(vi), the sponsor is required to essentially audit the auditor s audit of the internal controls review. Sponsors would need to hire another third party firm and the cost and redundancy of experts goes well into the territory of diminishing returns. We believe that TSXV currently has the power within its existing policies and sponsorship guidelines to require, as necessary, compliance with certain higher standards, that focus on areas of concern with the specific EMI. Application of the higher standard of review by the sponsor should be applied on a case-by-case basis as deemed necessary after a TSXV risk assessment, and in consultation with the sponsor. 13