egX Group Inc. and egX Canada Inc. - s. 147

Order

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, CHAPTER S.5,

AS AMENDED (Act)

AND

IN THE MATTER OF

egX GROUP INC.

AND

egX CANADA INC.

 

ORDER

(Section 147 of the Act)

WHEREAS egX Group Inc. (egX Group) and egX Canada Inc. (egX Canada) have filed an application dated June 23, 2008 (the Application) with the Ontario Securities Commission (Commission) requesting that the Commission make an order pursuant to section 147 of the Act exempting egX Group and egX Canada from the requirement to be recognized as a stock exchange under section 21 of the Act;

AND WHEREAS egX Group and egX Canada have represented to the Commission as follows:

1. egX Group was incorporated on December 12, 1977 under the Companies Act (British Columbia) and maintains its head office in British Columbia;

2. egX Canada was incorporated on November 15, 2004 under the Canada Business Corporations Act and is a wholly owned subsidiary of egX Group;

3. egX Group is a public company and is listed on the TSX Venture Exchange;

4. egX Canada will operate a stock exchange for real estate-related securities;

5. The British Columbia Securities Commission (BCSC) has recognized egX Canada as an exchange under section 24 of the Securities Act (British Columbia) pursuant to an order dated March 14, 2007, as amended by order dated May 28, 2008 (collectively, BCSC Order), attached as Appendix B to this exemption order;

6. egX Canada is subject to regulatory oversight by the BCSC which includes:

(i) reviewing Form 21-101F1 and the information filed by egX Canada on financial and operational matters,

(ii) reviewing and approving changes to egX Canada's regulatory instruments, procedures and practices pursuant to the Regulatory Instrument Review Protocol between egX Canada and the BCSC (Rule Protocol), and

(iii) conducting an oversight program of egX Canada to ensure that it meets appropriate standards for market operation and regulation;

7. egX Canada has retained Market Regulation Services Inc., now the Investment Industry Regulatory Organization of Canada (IIROC) as a regulation services provider under National Instrument 23-101 Trading Rules (NI 23-101) to provide certain market regulation services to egX Canada under a regulation services agreement executed on February 28, 2008 (the Regulation Services Agreement);

8. egX Canada has established a regulatory oversight committee (ROC) whose mandate is to oversee the performance of regulatory functions, ensure the adequacy of resources allocated to these functions, and review regulatory policy proposals;

9. CDS Clearing and Depository Services is the clearing agency for all trades on the exchange;

AND WHEREAS egX Group and egX Canada have agreed to the terms and conditions applicable to each one of them as set out in Appendix A;

AND WHEREAS based on the Application and subject to the representations and undertakings made by egX Group and egX Canada, the Commission is satisfied that exempting egX Group and egX Canada will not be prejudicial to the public interest;

The Commission hereby exempts egX Group and egX Canada from recognition as a stock exchange pursuant to section 147 of the Act on the terms and conditions set out in Appendix A to this order.

DATED October 14, 2008.

"Carol S. Perry"

"Paulette L. Kennedy"

 

APPENDIX A

Terms and Conditions

PART I GENERAL

Criteria

1. egX Group and egX Canada must continue to meet the criteria attached as Schedule 1 and will notify the Commission of material changes to the facts included in the Application.

Information Sharing

2. Upon request by the Commission to the BCSC, egX Group and egX Canada will provide to the Commission through the BCSC any information in the possession of egX Group or egX Canada, or over which egX Group or egX Canada has control, relating to egX participants as defined in egX Canada's Trading Rules (egX Participants), listed issuers as defined in egX Canada's Listings Manual (egX Listed Issuers), shareholders and the market operations of egX Canada, including but not limited to shareholder and egX Participant lists, products, trading information and disciplinary decisions.

Submission to Jurisdiction and Agent for Service

3. For greater certainty, egX Group and egX Canada will submit to the non-exclusive jurisdiction of (i) the courts and administrative tribunals of Ontario and (ii) an administrative proceeding in Ontario, in a proceeding arising out of, related to or concerning or in any other manner connected with the activities of egX Group and egX Canada in Ontario.

4. egX Group and egX Canada will file with the Commission a valid and binding appointment of agent for service in Ontario upon whom may be served a notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding arising out of or relating to or concerning egX Group and egX Canada's activities in Ontario.

PART II egX GROUP

Regulation of egX Group

5. egX Group will maintain its reporting issuer status in British Columbia and in the event that at any time, egX Group ceases to be a reporting issuer in British Columbia, it will immediately notify the Commission.

Governance

6. egX Group will ensure that at least fifty percent (50%) of its directors will be independent. A director is independent if he or she is independent within the meaning of section 1.4 of National Instrument 52-110 Audit Committees, as amended from time to time. For greater certainty, an associate, director, officer or employee of an egX Participant will not be considered independent.

Allocation of Resources and Financial Viability

7.

(a) egX Group will, subject to paragraph 7(b) and for so long as egX Canada carries on business as a stock exchange, allocate sufficient financial and other resources to egX Canada to ensure that egX Canada can carry out its functions in a manner that is consistent with the public interest and the terms and conditions of Part III of this Appendix A.

(b) egX Group will notify the Commission immediately upon becoming aware that it is or will be unable to allocate sufficient financial and other resources to egX Canada to ensure that it can carry out its functions in a manner that is consistent with the public interest and the terms and conditions of Part III of this Appendix A. egX Group will also advise the Commission of the steps being taken to rectify the situation.

8. egX Group must continue to report to the BCSC, on a quarterly basis, its capital that is available to fund cash flow requirements for egX Group and its subsidiaries for the subsequent six-month period and its plans to deal with any cash flow deficiency for the six-month period (financial viability report). egX Group will provide the Commission with copies of the financial viability reports filed with the BCSC and notify the Commission of any changes to the format or content of these reports.

9. egX Group must file with the Commission audited annual consolidated financial statements within 120 days of each year end and unaudited quarterly consolidated financial statements within 60 days of each quarter end, or such shorter period as is mandated for reporting issuers to file such financial statements under applicable securities legislation.

Compliance

10. egX Group must carry out its activities as a stock exchange exempted under section 21 of the Act. egX Group will do everything within its control to cause egX Canada to carry out its activities as an exchange exempted from recognition under section 21 of the Act, and to comply with the terms and conditions in Part III of this Appendix A.

PART III egX CANADA

Regulation of egX Canada

11. egX Canada must continue to be recognized as an exchange by the BCSC in accordance with the terms and conditions set out in the BCSC Order attached as Appendix B to this exemption order.

12. egX Canada must continue to be subject to any joint regulatory oversight as may be established and prescribed by the BCSC and the Commission from time to time.

Governance

13. egX Canada must ensure that at least fifty percent (50%) of its directors will be independent. A director is independent if he or she is independent within the meaning of section 1.4 of National Instrument 52-110 Audit Committees, as amended from time to time. For greater certainty, an associate, director, officer or employee of an egX Participant will not be considered independent.

14. The ROC must be composed of at least 50% of independent members as defined in term and condition 13 above.

Access

15. egX Canada will not provide direct access to persons or companies in Ontario unless they are appropriately registered to trade in securities in Ontario. egX Canada must require them to notify it immediately if their registration has been revoked, suspended or amended by the Commission and following such notice, egX Canada will promptly and appropriately restrict access.

Regulation of Participants on egX Canada

16. egX Canada must continue to retain IIROC as a regulation services provider to provide to egX Canada certain regulation services which have been approved by the BCSC.

17. As set out in the Regulation Services Agreement, IIROC will be entitled to exercise all the authority of egX Canada with respect to the administration and enforcement of the Universal Market Integrity Rules (UMIR) and other related rules, policies and guidance.

18. egX Canada shall continue to perform all other regulation functions not performed by IIROC.

19. egX Canada must provide the Commission through the BCSC with copies of the following documents provided to the BCSC under the BCSC Order:

(a) the list of regulatory services provided by IIROC and services carried out directly by egX Canada and any updates made thereto, and

(b) the report of egX Canada's assessment of IIROC's performance and recommendations for improvements, and egX Canada's proposed actions to take as a result.

Regulation of Issuers on egX Canada

20. Three years after the date of this order, egX Canada must self-assess its performance with respect to monitoring and enforcing its timely disclosure requirements on egX Listed Issuers. Such self-assessment must include an assessment of the effectiveness of the Regulatory Co-operation Protocol with IIROC. egX Canada must file its self-assessment, together with any recommendations for improvements, with the Commission within 90 days following the completion of the assessment.

Rules and Rule-Making

21. egX Canada must concurrently provide the Commission with copies of all rules, policies and other regulatory instruments that it files for review and approval with the BCSC under the Rule Protocol. Once the BCSC has approved the rules, egX Canada will provide copies of all final rules, policies and other regulatory instruments to the Commission within two weeks of approval by the BCSC.

Financial Viability

22. egX Canada must file with the Commission all financial reports and financial statements that it provides to the BCSC.

23. If egX Canada does not have sufficient working capital to meet its projected capital expenditures and operating costs for the subsequent six months, egX Canada will file with the Commission a copy of the letter delivered by its President to the BCSC advising the BCSC of the reason for the deficiency, and the steps being taken to rectify the problem.

Information Transparency

24. Prior to the launch of the exchange in Ontario, egX Canada will execute an agreement with an information vendor in order to satisfy its obligation under Part 7 of National Instrument 21-101.

Outsourcing

25. egX Canada must obtain the approval of the BCSC prior to making any material amendments to any outsourcing arrangement of a key regulatory function.

Filing Requirements

26. egX Canada shall file with the Commission, concurrently with filing the information with the BCSC, any related information concerning egX Canada that is required pursuant to National Instrument 21-101 Marketplace Operation, including the report relating to the independent systems review.

Reporting Issuer Status

27. egX Canada must require any egX Listed Issuer that has a significant connection to Ontario to make application to become a reporting issuer in Ontario.

Conflicts of Interest

28. egX Canada must require any egX Listed Issuer that is not a reporting issuer in Ontario or Quebec to comply with Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions.

Restricted Securities

29. egX Canada shall not list restricted securities, as defined in National Instrument 41-101 General Prospectus Requirements, unless the constating documents of the issuer of the restricted securities:

(a) provide a mechanism to require that holders of restricted securities will have the opportunity to participate in any take-over bid for any class of equity securities on equal terms with holders of the equity securities, and

(b) provide holders of restricted securities with equal rights relating to take-over bids as the holders of the equity securities have under applicable securities legislation,

notwithstanding the fact that the restricted securities are a separate class of securities with different rights than the class of equity securities subject to the take-over bid.

 

SCHEDULE 1

Criteria for Exemption of egX Canada and egX Group from Recognition

as a Stock Exchange in Ontario

PART 1 REGULATION OF THE EXCHANGE

egX Canada is recognized by another securities commission or similar regulatory authority in Canada and is, and will continue to be, in compliance with NI 21-101 and NI 23-101, each as amended from time to time.

PART 2 GOVERNANCE

2.1 Governance

The governance structure and governance arrangements of egX Group and egX Canada ensure:

(a) effective oversight of egX Canada,

(b) egX Group and egX Canada's business and regulatory decisions are in keeping with their public interest mandate,

(c) fair, meaningful and diverse representation on the Board and any committees of the Board, including a reasonable proportion of independent directors,

(d) a proper balance among the interests of the different persons or companies accessing the facilities and/or services of egX Canada,

(e) egX Group and egX Canada have policies and procedures to appropriately identify and manage conflicts of interest,

(f) each director or officer, and each person or company that owns or controls, directly or indirectly, more than 10% of egX Group and egX Canada is a fit and proper person, and

(g) there are appropriate qualifications, remuneration, limitation of liability and indemnity provisions for directors and officers.

PART 3 FEES

3.1 Fees

(a) All fees imposed by egX Canada are equitably allocated and fees do not have the effect of creating unreasonable barriers to access.

(b) The process for setting fees is fair and appropriate, and the fee model is transparent.

PART 4 ACCESS

4.1 Fair Access

(a) egX Canada has established appropriate written standards for access to its services including requirements for participants to be appropriately registered under Ontario securities laws or exempted from these requirements.

(b) The access standards and the process for obtaining, limiting and denying access are fair, transparent and applied reasonably.

PART 5 REGULATION OF PARTICIPANTS AND ISSUERS ON egX CANADA

5.1 Regulation

egX Canada has the authority, capacity, systems and processes to undertake its regulation functions by setting requirements governing the conduct of its participants and issuers, monitoring their conduct, and appropriately disciplining them for violations of egX Canada requirements.

PART 6 RULEMAKING

6.1 Purpose of Rules

(a) egX Canada's rules, policies or other similar instruments (Rules) are designed to govern the operations and activities of participants and issuers.

(b) In addition to meeting the requirements in section 5.3 of NI 21-101, the Rules are designed to

(i) provide a framework for disciplinary and enforcement actions, and

(ii) ensure a fair and orderly market.

PART 7 DUE PROCESS

7.1 Due Process

For any decision made by egX Canada that affects a participant or issuer, including a decision related to access, listing, exemptions, or discipline, egX Canada ensures that:

(a) parties are given an opportunity to be heard or make representations, and

(b) egX Canada keeps a record, gives reasons and provides for appeals of its decisions.

PART 8 SYSTEMS AND TECHNOLOGY

8.1 Systems and Technology

Each of egX Canada's critical systems has appropriate internal controls to ensure completeness, accuracy, integrity and security of information, and in addition, has sufficient capacity and business continuity plans to enable egX Canada to properly carry on its business. Critical systems are those that support the following functions listed in Part 12 of NI 21-101:

(a) order entry,

(b) order routing,

(c) execution,

(d) trade reporting, and

(e) trade comparison,

and, the following additional functions:

(f) data feeds,

(g) market surveillance,

(h) trade clearing, and

(i) financial reporting.

8.2 Information Technology Risk Management Procedures

egX Canada has appropriate risk management procedures in place including those that handle trading errors, trading halts and circuit breakers.

PART 9 FINANCIAL VIABILITY AND REPORTING

9.1 Financial Viability

egX Canada has sufficient financial resources for the proper performance of its functions and to meet its responsibilities.

PART 10 CLEARING AND SETTLEMENT

10.1 Clearing Arrangements

egX Canada has appropriate arrangements for the clearing and settlement of transactions through a clearing agency that is appropriately regulated by a securities regulatory authority.

PART 11 TRANSPARENCY

11.1 Transparency

egX Canada has adequate arrangements for satisfying its pre-trade and post-trade information transparency obligations under Part 7 of NI 21-101. This information is provided to all participants on an equitable basis.

PART 12 OUTSOURCING

12.1 Outsourcing

Where egX Group and egX Canada have outsourced any of their key functions including to an affiliate, each has appropriate, formal arrangements and processes in place that permit each to meet its obligations, and are in accordance with industry best practices.

PART 13 INFORMATION SHARING AND REGULATORY COOPERATION

13.1 Information Sharing and Regulatory Cooperation

egX Group and egX Canada have mechanisms in place to ensure that each is able to cooperate, by sharing information or otherwise, with the Commission and its staff, self-regulatory organizations, other exchanges, investor protection funds, and other appropriate regulatory bodies.

 

APPENDIX B

COR#07/022

Recognition Order

egX Canada Inc.

Section 24 of the Securities Act, RSBC 1996, c. 418

¶1 egX Canada Inc., a subsidiary of Global Financial Group Inc. (GFG), has applied for recognition as an exchange in British Columbia under section 24 of the Act.

¶2 egX represents that it will operate an exchange for real estate related securities, will maintain its head office in British Columbia, and will:

(a) provide listing and corporate finance services;

(b) perform listed issuer regulation functions;

(c) provide trading services to its participants; and

(d) perform market regulation functions.

¶3 In addition to being required to comply with the requirements of the Act, National Instrument 21-101 Marketplace Operations (NI 21-101), and National Instrument 23-101 Trading Rules (NI 23-101), egX has agreed to comply with Schedules A and B to this order.

¶4 Based on the application and the representations, acknowledgements, and undertakings made by egX and GFG, the Commission is satisfied that recognizing egX will not be prejudicial to the public interest.

¶5 The Commission recognizes egX as an exchange under section 24 of the Act and does not object to the egX Trading Rules and Listings Manual so long as egX

(a) before operating as an exchange, complies with Schedule A, and

(b) complies with Schedule B, the Act, NI 21-101 and NI 23-101.

¶6 This recognition will continue until the Commission, after giving egX an opportunity to be heard, revokes or varies it.

¶7 March 14, 2007

"Douglas M. Hyndman"
Chair

 

Schedule A -- Pre-operating conditions

egX's recognition is conditional on egX, before it begins operating as an exchange:

(a) confirming to the Commission that its connectivity with Market Regulation Services Inc. is complete and it has entered into an agreement with RS for market regulation services;

(b) confirming to the Commission that its connectivity with CDS is complete and that it has entered into an agreement with CDS for clearing and settlement services;

(c) filing with the Commission an audit review report of egX's trading systems;

(d) filing with the Commission an external and internal vulnerability test report on egX's non-trading systems; and

(e) confirming to the Commission that all steps necessary to begin exchange operations have been taken, as set out in the business plan egX filed with its application for recognition.

 

Schedule B -- Conditions of Recognition

Public interest

1. egX must regulate listed issuers and its market to serve the public interest in protecting investors and market integrity. It must articulate and ensure it meets a clear public interest mandate for its regulatory functions.

Corporate governance

2. egX's corporate governance system must ensure effective oversight of egX's management and regulatory functions.

3. egX must ensure that each director, officer, and significant security holder{1} is a fit and proper person{2} for that role.

Conflicts of interest

4. egX must effectively identify and manage conflicts of interest.

Access

5. egX must have fair access criteria for its trading and listing services, and apply them fairly and transparently.

Financial viability and reporting

6. egX must have sufficient financial resources to perform its functions and meet its responsibilities.

7. egX must:

(a) report quarterly to the Commission what capital is available and why that capital is sufficient to ensure egX can perform its functions and meet its responsibilities for the next six months;

(b) report immediately to the Commission when it does not have sufficient capital for the next six months, setting out the reasons for the deficiency and the steps egX will take to rectify the deficiency; and

(c) file unaudited quarterly financial statements within 60 days of each quarter's end prepared according to generally accepted accounting principles.{3}

Compliance and control systems

8. egX must maintain an effective system for compliance with the securities legislation and this recognition order, as well as its own internal policies and procedures.

9. egX must maintain controls to manage the risks associated with its business, including an annual review of its contingency and business continuity plans.

Outsourcing

10. egX must obtain the Commission's consent before entering into an outsourcing arrangement.

Clearing and settlement

11. egX must make appropriate arrangements for clearing and settlement through a recognized clearing agency.

Regulation

12. egX must regulate its marketplace effectively.

Regulatory instrument review process

13. egX must follow the regulatory instrument review process established by the Commission from time to time.

Accountability

14. At least quarterly, egX must report to the Commission all significant issuer non-compliance, with information acceptable to the Commission about the issuers and other persons involved, the nature of the deficiencies, and the action taken or planned to deal with the issues.

15. At least quarterly, egX must, directly or through RS, report to the Commission all significant market non-compliance, with information acceptable to the Commission about the participants or other persons involved, the nature of the deficiencies, and the action taken or planned to deal with the issues.

16. At least quarterly, egX must, directly or through RS, report to the Commission all significant exemptions from, or waivers of, its requirements, including information about the issuers or participants involved, the nature of the waivers or exemptions, and the reasons for granting them.

17. At least annually, egX must assess RS's performance and report to egX's board of directors with any recommendations for improvements. egX must provide a copy of the report to the Commission and advise what actions it proposes to take as a result.

18. Annually, egX must provide a self-assessment to the Commission, including reporting against this recognition order and other securities regulation requirements.

19. Annually, egX must provide to the Commission, for its approval, a current list of regulatory services provided by RS and services carried out directly by egX and any proposed amendments to it.

20. Annually, egX must:

(a) review and report on each technology system's and each data centre's computer operation's vulnerability to internal and external threats; and

(b) report on its review of its contingency and business continuity plans under paragraph 9.

21. egX must promptly report to the Commission any possible significant violations of securities legislation.

22. egX must promptly notify the Commission of any material systems failures and changes.

23. egX must comply with any additional accountability requirements the Commission sets from time to time.

Information sharing and regulatory cooperation

24. To assist other regulatory authorities in regulatory matters, egX must share information and cooperate with

(a) the Commission and other Canadian securities regulatory authorities,

(b) recognized exchanges,

(c) recognized regulation services providers,

(d) recognized self-regulatory organizations,

(e) recognized clearing agencies, and

Section 1 other regulatory authorities responsible for supervising or regulating securities firms or financial institutions,

subject to privacy or other laws about the collection, use, and disclosure of personal and business information.

COR #08/147

Variation Order

egX Canada Inc.

Section 171 of the Securities Act, RSBC 1996, c. 418

Background

¶1 The Commission issued an order on March 14, 2007 under section 24 of the Act (Recognition Order) recognizing egX Canada Inc. (egX) as an exchange, subject to certain conditions.

¶2 The conditions, attached to the Recognition Order as Schedules A and B, refer to Market Regulation Services Inc. (RS) in several clauses.

¶3 Effective June 1, 2008, RS will combine its operations with the Investment Dealers Association of Canada to form the Investment Industry Regulatory Organization of Canada (IIROC). After the combination, IIROC will assume RS's function as a regulation services provider.

Order

¶4 Because it is not prejudicial to the public interest, the Commission orders under section 171 of the Act, that Schedules A and B of the Recognition Order are varied as follows:

1. each reference to Market Regulation Services Inc. is replaced with a reference to Investment Industry Regulatory Organization of Canada;

2. each reference to RS is replaced with a reference to IIROC.

¶5 May 28, 2008 effective June 1, 2008

"Brent W. Aitken"
Vice Chair

{1} A significant security holder holds 10% or more beneficial ownership or voting control.

{2} A fit and proper person is (a) appropriately qualified for that role by education and experience, and (b) of good character and integrity.

{3} egX must also file annual audited financial statements (section 5.6, NI 21-101).