Securities Law Update

SEC Makes Temporary Short Sales Rule Permanent

On July 27, 2009 the Securities and Exchange Commission ("SEC") announced several actions intended to protect against abusive short sales and make more short sale information available to the public.

First, the SEC made permanent an interim final temporary rule, Rule 204T, that seeks to reduce the potential for abusive "naked" short selling in the securities market. The new rule, Rule 204, requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. The temporary rule, approved by the SEC in the fall of 2008, was set to expire on July 31.

Second, the SEC is working together with several self-regulatory organizations ("SRO") to make short sale volume and transaction data available through the SRO websites. This effort will result in a substantial increase over the amount of information presently required by another temporary rule, known as Temporary 10a-3T. That rule applies only to certain institutional money managers and does not require public disclosure.

Third, the SEC intends to hold a public roundtable on September 30 to discuss securities lending, pre-borrowing and possible additional short sale disclosures. The roundtable will consider, among other topics, the potential impact of a program requiring short sellers to pre-borrow their securities, possibly on a pilot basis, and adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities.

"Naked" Short Sales: In a "naked" short sale the investor sells shares "short" without first having borrowed them. Such a transaction is permitted because there is no legal requirement that a short seller actually borrow the shares before effecting a short sale.

Now, before effecting a short sale, Rule 204T requires that the broker-dealer, as opposed to the seller, "locate" an entity that the broker reasonably believes can deliver the shares within three days after the trade – what's known as T+3. Also, if reasonable, a broker-dealer may rely on a short seller's assurance that the short seller has located his or her own lender that can deliver shares in time for settlement.

"Fails-to-deliver": If an investor or its broker-dealer does not deliver shares by T+3, a "failure to deliver" occurs. Where an investor or its broker-dealer neither locates nor delivers shares, a "naked" short sale has occurred.

A "fail to deliver" can occur for legitimate reasons, such as mechanical errors or processing delays. Further, a "fail to deliver" could occur as a result of a long sale – that is the typical buy-sell transaction – as well as a short sale.

"Fails to deliver", such as failure resulting from potentially abusive "naked" short selling may have a negative effect on shareholders, potentially depriving them of the benefits of ownership such as voting and lending. They also may create a misleading impression of the market for an issuer's securities.

Adopting Regulation SHO: Due to its concerns regarding persistent "fails to deliver" and potentially abusive "naked" short selling, the SEC adopted Regulation SHO, which became effective in early 2005. This regulation imposes, among other things, the requirement that broker-dealers locate a source of borrowable shares prior to selling short.

In addition, Regulation SHO requires that firms that clear and settle trades must purchase shares to close out these "fails to deliver" within a certain time frame, 13 days. This "close-out" requirement only applies to certain equity securities with large and persistent "fails to deliver", known as threshold securities.

Rule 204: The SEC has made permanent a temporary rule that was approved in 2008 in response to continuing concerns regarding "fails to deliver" and potentially abusive "naked" short selling. In particular, temporary Rule 204T made it a violation of Regulation SHO and imposes penalties if a clearing firm does not purchase or borrow shares to close-out a "fail to deliver" resulting from a short sale in any equity security by no later than the beginning of trading on the day after the fail first occurs (T+4).

If you have questions about Regulation SHO or short sales, contact any member of Clark Wilson's Corporate Finance / Securities Group.

New Canadian Passport System For Dealer And Advisor Registration Process

In July 2009, the Canadian Securities Administrators ("CSA") published the details of a new national process for the registration of firms and individuals who deal in securities, provide investment advice or manage investment funds. The new process is a passport registration process and is being introduced by the CSA together with a new national registration regime for securities dealers and advisors. Both are part of the CSA's larger Registration Reform Project. The Registration Reform Project aims to harmonize and streamline the different sets of registration rules that exist in each Canadian jurisdiction into one national regime.

The registration process is set out in a new policy, National Policy 11-204 Process for Registration in Multiple Jurisdictions ("NP 11-204"). NP 11-204 will replace and streamline the current National Registration System and establish the process for obtaining registration in multiple jurisdictions, including Ontario. The new registration regime will be covered by a new national instrument, National Instrument 31-103 Registration Requirements and Exemptions. Multilateral Instrument 11-102 Passport System will be amended to apply the passport system to the dealer and advisor community.

The new registration process will be a passport system, similar to the current passport system used in CSA jurisdictions for filing prospectuses. A key feature of the registration passport system is that it will allow individuals and firms to register in more than one Canadian jurisdiction by dealing only with a "principal regulator", rather than dealing separately with the securities regulatory body of each jurisdiction in which they want to register.

All CSA jurisdictions, except Ontario, have approved the rule and policy amendments relating to the new passport registration system. CSA members in all provinces and territories (including Ontario) have approved a new policy containing procedures for registration in multiple jurisdictions. The policy also includes an interface system for firms and individuals registered in passport jurisdictions in Canada to also register in Ontario. Although the passport system will not be adopted in Ontario, the Ontario Securities Commission ("OSC") can still act as the "principal regulator" under the passport system. This means that Ontario-based registrants will only need to deal with the OSC, even when they are also active in other parts of Canada.

Both the new registration regime and process will come into force on September 28, 2009.

If you have any questions about the new dealer/advisor registration process or related matters, contact any member of Clark Wilson's Corporate Finance / Securities Group.

BCSC OFfers To Pre-Review Mining Technical Disclosure For Short Form Offerings

Effective September 1, 2009, mining issuers that are planning an offering under National Instrument 44-101 Short Form Prospectus Distributions can take advantage of the British Columbia Securities Commission's ("BCSC") new expedited review process of their technical disclosure, if its principal regulator (as defined under Multilateral Instrument 11-102 Passport System) is the BCSC. The BCSC anticipates that this initiative will facilitate the timely receipt for a short form prospectus for a mining issuer's offering. The pre-prospectus review is intended to indentify any potential issues that may delay the final receipt of a short form prospectus.

Mining issuers seeking this advance review must prepare an application to the attention of Mr. Robert Holland, the BCSC's Chief Mining Advisor, at least 10 days prior to the date the issuer expects to file its preliminary short form prospectus. The application must be emailed to review.request@bcsc.bc.ca and must include the name of the mining issuer, the name and contact details of the person making the application, a list of the mining issuer's material properties and the target date for the filing of the mining issuer's short form prospectus. The BCSC will not charge an application fee for this service.

The BCSC will use its best efforts to review the mining issuer's technical disclosure filed on SEDAR for compliance with National Instrument 43-101 Standards of Disclosure for Mineral Projects, the mining issuer's latest annual information form, all news releases and material change reports since the filing of the latest annual information and the most recently filed 43-101F1 technical reports for the mining issuer's material properties.

If you have questions about the new technical disclosure review policy, contact any member of Clark Wilson's Corporate Finance / Securities Group.