Canada: TSX Proposes New Listing Requirements For Investment Funds And Structured Products

On January 15, 2015, the Toronto Stock Exchange (the TSX) published for comment proposed amendments (the Proposed Amendments) to the TSX Company Manual (the Manual) that introduce a tailored set of rules for exchange traded products, including exchange traded funds and exchange traded notes (collectively ETPs), closed-end funds and structured products, such as convertible notes and principal or capital protected notes (collectively non-corporate issuers). A copy of the Proposed Amendments is available here. The comment period on the Proposed Amendments ends March 16, 2015.

A compendium of TSX listing requirements for these types of non-corporate issuers is a welcome addition to the Manual. The current rules in the Manual fit awkwardly with these issuers – the Manual was principally developed for traditional corporate entities, while the requirements for non-corporate issuers have been developed on an ad hoc basis over the past several years.

The increase in prominence of ETPs and closed-end funds in Canada has motivated the amendments, and although listed structured products have not seen similar growth, the introduction of these rules may be the TSX's move to market itself to providers in this category. The TSX is also catching up with its competitor exchanges, like the Aequitas Neo Exchange, which already has listing requirements for ETPs and closed-end funds in its listing manual.

Whatever the motivation, in developing a tailored set of rules for non-corporate issuers, the TSX is codifying (and in some cases deviating from) the practices it has adopted over time for non-corporate issuers. The key features of the Proposed Amendments are highlighted below.

Listing on the Exchange

The Proposed Amendments set out minimum listing criteria for non-corporate issuers in three distinct categories: market capitalization, the structure and experience of management and the frequency of net asset value (NAV) calculation.

Currently, there are no published minimum market capitalization requirements for non-corporate issuers, although threshold requirements have developed in practice. The Proposed Amendments will impose a $1 million minimum market capitalization for ETPs and structured products, which is a marked departure from the previously accepted minimum of $5 million (often reduced to $2 million upon application). For closed-end funds, the proposed minimum market capitalization is $20 million, which is consistent with the TSX's adopted practice and the minimum market cap generally required by the industry.

The Proposed Amendments require that the manager of non-corporate issuers have "adequate and appropriate experience in the asset management industry, as determined by the TSX", along with a CEO, a CFO, and a secretary. There must also be an independent review committee in respect of the issuer, presumably with the mandate imposed by, and acting in accordance with, National Instrument 81-107 Independent Review Committee for Investment Funds.

There is no further articulation of what proficiency requirements are expected from management of the manager and for which individuals specifically. Given the emphasis of the Canadian Securities Administrators (the CSA) on enhancing the regulation of managers of investment funds (whether offered publicly or privately) over the past few years, by, among other things, imposing a registration requirement for fund managers, we would like to see the TSX place more reliance on the fact that managers are regulated by the CSA, without imposing additional requirements.

The Proposed Amendments also provide for minimum frequency of NAV calculation, being daily for ETPs and at least weekly for closed-end funds and structured products, which must be available on a publicly accessible website. Managers of closed-end funds will be aware that National Instrument 81-106 Investment Fund Continuous Disclosure imposes a daily NAV calculation requirement for investment funds that use derivatives or sell securities short.

Listing Additional Securities

ETPs will continue to be required to notify the TSX on a quarterly basis about any additional issuances of listed securities in the previous quarter. Such notification must be accompanied by a legal opinion that all securities have been validly issued as fully paid and non-assessable. No prior notification will be required for the continuous distribution of listed securities of ETPs. However, ETPs must notify the TSX in writing of any transaction involving the issuance or potential issuance of any new class of securities that is convertible into a listed class of ETP securities.

Closed-end funds and structured products will need pre-approval from the TSX to issue additional securities, other than unlisted, non-voting, non-participating securities. The TSX may impose conditions on this approval, though no further guidance is provided about what those terms may be. Further, the issuance of additional securities of a listed class must yield net proceeds per security (which, we note, must take into account the costs of the offering) to the issuer of no less than 100% of the most recently calculated NAV per security. This is consistent with the recent amendments to National Instrument 81-102 Investment Funds (NI 81-102) and will continue to make it difficult for many closed-end funds to list additional securities of an existing class because, in many instances, securities of closed-end funds trade at a discount to NAV, making the securities available pursuant to an additional listing less marketable in comparison.

Generally, a new class of listed securities must meet the minimum market capitalization requirements for an original listing noted above. The proposed rules provide an exception for ETPs and closed-end funds where the new class of securities is convertible into a listed class, in which case the minimum market capitalization is waived for ETPs and reduced to $2 million for closed-end funds. Structured product issuers listing an additional class of securities will be required to meet the $1 million minimum market capitalization requirement.

Ongoing Listing Requirements

The Proposed Amendments deal with instances in which non-corporate issuers may be suspended or delisted from the TSX. A closed-end fund may be suspended or delisted if the market value of its securities falls below $3 million for any period of 30 consecutive trading days, if the number of freely-tradable, publically held securities is less than 500,000 or if the number of public securityholders is less than 150.

An ETP or a structured product may be suspended or delisted if, in the opinion of the TSX, the continued listing "would not be consistent with preserving the overall quality of the market", taking into account trading liquidity, the market value of the listed securities, the absence of a designated broker (in the case of an ETP) or a market maker for the product (in the case of a structured product), and the bid and ask spread.

The Proposed Amendments also provide that non-corporate issuers must "pre-clear" with the TSX any materials sent to securityholders (other than continuous disclosure documents, such as financial statements and management reports of fund performance). This may capture additional securityholder materials that were not previously required to be cleared by the TSX.

Fundamental Changes to ETPs and Closed-end Funds

We suspect product manufacturers may take issue with the requirement that securityholder approval be obtained for any amendment to the constating documents of ETPs or closed-end funds that are not covered by the general amendment provisions set out in those constating documents.

Securityholder approval for specified fundamental changes to investment funds is governed by NI 81-102, which was recently extended to closed-end funds. Flexibility to amend such constating documents (in accordance with their terms) is necessary in order to react to market events and changes to applicable laws. Non-corporate issuers should consider reviewing their constating documents to determine whether these Proposed Amendments have the potential to feter this flexibility.

Securityholder approval is also proposed for the extension of an ETP or closed-end fund beyond the contemplated termination date, unless securityholders are able to redeem securities at NAV on or about the originally contemplated termination date.

It will be important to comment on the Proposed Amendments before the expiry of the comment period on March 16, 2015. We would be pleased to assist you in preparing a comment letter. Please contact your usual lawyer in BLG's Investment Management practice group, the authors of this Bulletin or one of the leaders of the Investment Management practice group listed below if you would like our assistance or if you have any questions on the proposed rules or how they may affect the listing of new products.

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