CSA and IIROC Seek Guidance on Regulatory Framework for Short Selling in Canada
The Canadian Securities Administrators (“CSA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”) have released a joint Staff Notice 23-329 (the “Staff Notice”) seeking feedback from investors, market participants, and the public on a broad range of issues relating to the regulatory framework surrounding short selling in Canada. Short selling is the practice of a seller, anticipating a decline in the price of a certain security, selling securities that the seller does not own with the intention of acquiring the securities at a lower price in the future.
The Staff Notice offers an overview of the existing regulatory landscape for short selling in Canada, provides an update on current initiatives relating to short selling, and describes recent international developments and the results of a study completed by IIROC on failed trades. The CSA and IIROC are accepting comments on the Staff Notice until March 8, 2023.
Current Canadian Regulatory Framework
The practice of short selling is subject to a well-developed regulatory framework in Canada, involving Canadian securities legislation and IIROC requirements. While all market participants are subject to Canadian securities legislation and are required to comply with Canadian securities laws relating to short selling (as described below), the short selling regime is primarily overseen by IIROC, allowing the organization to monitor and supervise potentially inappropriate short selling practices in a timely manner.
CSA Framework
Provincial securities legislation requires a person or company who places an order for the sale of a security with a registered dealer to declare to such dealer at the time of placing the order that such person or company does not own the security.
As well, provincial securities legislation and National Instrument 23-101 – Trading Rules prohibit activities that are manipulative and/or deceptive, which can occur in the context of short selling.
IIROC Framework
Similar to the CSA Framework, IIROC’s Universal Market Integrity Rules (“UMIR”) prohibit activities that are manipulative and/or deceptive, such as entering an order for the sale of a security without, at the time of entering the order, having a reasonable expectation of settling any trade that would result from the execution of the order on the settlement date. IIROC also monitors for potentially abusive trading activities, by using algorithms to search for unusual activity, monitoring social media and chat rooms, and reviewing Extended Failed Trade Reports (as described below). IIROC has additional alerts set up that detect changes in the historical pattern of short selling for a particular security, allowing IIROC to determine if short selling is becoming concentrated within a particular dealer or client. If unusual levels of short selling are detected, IIROC has broad powers to intervene, including but not limited to the ability to cancel a trade, impose a market halt, contact the listed issuer, and refer matters to IIROC enforcement for further review and potential discipline.
Further, UMIR requires Participants (defined as dealers that are members of an exchange, users of a quotation or trade reporting system, and subscribers of an alternative trading system) and Access Persons (defined as persons other than Participants that are subscribers or users of a marketplace) to calculate and report to IIROC the aggregate short positions of each individual account twice a month.
UMIR imposes several requirements related to short selling on Participants and Access Persons, and grants IIROC certain protectionary abilities:
- Participant and Access Person Requirements
- Marking Orders. Participants and Access Persons are required to mark all orders representing a short sale as either “short” or “short-marking exempt”. A short-marking exempt order includes an order for a security from an account that is (i) an arbitrage account, (ii) an account of a market maker for that security, or (iii) certain other specified accounts that buy and sell securities and that, at the end of any trading day, do not have more than a nominal long or short position in a particular security.
- Extended Failed Trade Reports. Participants and Access Persons are required to report Extended Failed Trades to IIROC. An Extended Failed Trade is a trade that did not settle and was not rectified within 10 trading days from the original settlement date.
- Prior Arrangements. If an Extended Failed Trade Report is filed with IIROC, further short sales generally cannot be made by that Participant or Access Person without having made prior arrangements to borrow the securities necessary for settlement.
- IIROC Capabilities
- Pre-Borrow Security Designation. IIROC has the ability to designate a security as a “Pre-Borrow Security”. A Pre-Borrow Security is a security that has been designated to be a security in respect of which an order that on execution would be a short sale may not be entered on a marketplace unless the Participant or Access Person has made arrangements to borrow the securities that would be necessary to settle the trade prior to the entry of the order.
- Short Sale Ineligible Security. IIROC has the ability to designate a security as a “Short Sale Ineligible Security”. A Short Sale Ineligible Security is a security or class of securities that has been designated to be a security in respect of which an order that, on execution, would be a short sale may not be entered on a marketplace for a particular trading day or trading days.
Key Issues for Consultation
IIROC and the CSA are soliciting feedback from stakeholders on a broad range of issues, including questions and concerns relating to:
- the 2012 repeal of the “tick test”, being a restriction on the price at which certain types of trades can occur;
- short selling and pre-borrow requirements;
- IIROC’s Extended Failed Trades requirements;
- transparency of short selling positions; and
- buy-in and close-out requirements of CDS.
There has been a lot of discussion in the media about the potential abusive practice of activist short selling. However, the empirical evidence seems to suggest this issue may not be one of material significance. At the same time, there is always the potential for abuse, particularly in an area of limited regulation. Any reforms that IIROC and the CSA ultimately choose to adopt need to be data driven and need to carefully balance investor protection and market efficiency objectives.
A copy of the Staff Notice, which includes eight specific questions the CSA and IIROC are hoping stakeholders will address, can be found here. Please feel free to reach out to any member of our Capital Markets or Financial Services Regulatory groups to discuss.
Expertise
Authors
Insights
-
Banking and Financial Services
The Acquisition and Leveraged Finance Review 9th Edition - Canada Chapter
Jean Anderson, David Nadler, Carrie Smit, David Wiseman, Caroline Descours, Steven Marmer, and Cathy Costa-Faria co-authored the Canada Chapter of The Law Reviews' Acquisition and Leveraged Finance… -
Capital Markets
CSA and IIROC Seek Guidance on Regulatory Framework for Short Selling in Canada
The Canadian Securities Administrators (“CSA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”) have released a joint Staff Notice 23-329 (the “Staff Notice”) seeking feedback… -
Capital Markets
TSX Proposes TSX Company Manual Amendments to Clarify When it Will Apply its Private Placement Rules to Prospectus Offerings
The Toronto Stock Exchange (TSX) has published for comment proposed amendments (the “Proposed Amendments”) to the TSX Company Manual (the “Manual”) that clarify when the TSX will apply its private… -
Capital Markets
ISS Announces Updates to Benchmark Proxy Voting Guidelines for 2023
Proxy advisor Institutional Shareholder Services (ISS) recently updated its Benchmark Proxy Voting Guidelines, which generally apply to shareholder meetings beginning in 2023 or 2024. The updates… -
Capital Markets
CSA Announces Results of Continuous Disclosure Review for Fiscal Years 2021 and 2022 Emphasizing Challenges of Disclosure During Economic Uncertainty
The Canadian Securities Administrators (CSA) recently published Staff Notice 51-364 (the “Staff Notice”), summarizing the results of its Continuous Disclosure Review Program for fiscal years… -
Capital Markets
OSC Introduces Self-Certified Investor Prospectus Exemption
OverviewThe Ontario Securities Commission (OSC) has adopted a new prospectus exemption (the “Self-Certified Investor Prospectus Exemption”) applicable to prospective investors that meet certain…
Featured Work
-
Capital Markets
NorthWest Healthcare Properties REIT $150 Million Supplement and $165 Million Equity Financing
Goodmans LLP acted for NorthWest Healthcare Properties Real Estate Investment Trust (TSX: NWH.UN) (“NorthWest” or the “REIT”) in connection with its $150,006,000 supplement dated March 25, 2022 and in… -
Capital Markets
BSR REIT $115 Million Bought Deal Equity Offering
Goodmans LLP acted for BSR in connection with its public offering of trust units of the REIT to a syndicate of underwriters led by BMO Capital Markets, RBC Capital Markets and CIBC Capital Markets… -
Capital Markets
Playmaker Capital Final Base Shelf Prospectus
Goodmans LLP acted for Playmaker Capital Inc. (TSX-V: PMKR) (“Playmaker”) in connection with the filing of its final short form base shelf prospectus on April… -
Capital Markets
NorthWest Healthcare Properties REIT Completes Public Equity Offering for Gross Proceeds of $172,506,900
Goodmans LLP acted for NorthWest Healthcare Properties Real Estate Investment Trust (TSX: NWH.UN) ("NorthWest" or the "REIT") in connection with its previously announced public offering (the "Public… -
Capital Markets
Medicine Man Technologies NEO Listing
Goodmans LLP acted for Medicine Man Technologies, Inc., dba Schwazze (OTCQX: SHWZ) (NEO: SHWZ) in connection with their listing of common shares on the NEO Exchange – a tier one Canadian stock… -
Capital Markets
Sienna Senior Living Common Share Offering for Gross Proceeds of Approximately $86 Million
Goodmans LLP acted for Sienna Senior Living Inc. (TSX:SIA) (“Sienna” or the “Company”) in the connection with a bought deal offering (the “Offering”) of common shares of the Company (“Common Shares…
News & Events
-
Capital Markets
Emily Ting named 2022 Lexpert Rising Star
Goodmans is pleased to congratulate Emily Ting who has been honoured as one of Lexpert® Rising Stars: Leading Lawyers Under 40 for 2022.Emily Ting is a partner and co-head of a business law group at… -
Banking and Financial Services
Goodmans named one of Canada's Best Law Firms for 2023
We’re pleased to announce Goodmans was once again named to The Globe and Mail’s Canada’s Best Law Firms list, recognizing the firm as one of the country’s best law firms for 2023.Goodmans was… -
Banking and Financial Services
The Legal 500 Canada Continues to Recognize Goodmans with Top Tier Rankings
We are pleased to announce Goodmans LLP has once again received top tier recognition from The Legal 500 Canada in their 2023 Guide released today. Recognition from The Legal 500 is based on…