IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF THE INVESTMENT DEALERS
ASSOCIATION OF CANADA REGULATION 2100.4
IN THE MATTER OF A HEARING AND REVIEW OF THE
INVESTMENT DEALERS ASSOCIATION OF CANADA'S
DECISION RE: THE REUTERS INFORMATION SERVICES
(CANADA) LIMITED APPLICATION FOR RECOGNITION
AS A MARKET TRANSPARENCY ORGANIZATION
Morley P. Carscallen, F.C.A. - Vice Chair
Counsel: T. Moseley - For Staff of the Ontario
Randee B. Pavalow Securities Commission
S. Sivarajan (student at law) ) ("Staff")
Peter C. Wardle - For Reuters Information Services
Lawrence E. Thacker (Canada) Limited ("Reuters")
James C. Tory - For Investment Dealers
Association of Canada ("IDA")
T. Nigel M. Campbell - For Cantor Fitzgerald L.P.
Alistair M. Crawley ("Cantor")
Mark J. Longo - For Star Data Systems Inc.
Rene R. Sorell - For Interdealer Brokers
Association of Canada ("IDBA")
These Proceedings arise from an application by Reuters to the Commission under sub-section 21.7(1) of the Securities Act ("Act") for a hearing and review ofthe decision of the IDA dated January 15, 1997 denying an application by Reuters to be a recognized market transparency organization ("RMTO").
Regulation 2100.4(d) of the IDA provides that to qualify for approval as an inter-dealer bond broker, an applicant must demonstrate and undertake that:
"it is a participant in or member of an organization which has been recognized by the Board of Directors and which provides for market transparency in thedomestic debt securities trading business carried on through approved inter-dealer brokers by making available to any interested person an electronic record-based digital feed of real-time market price, volume and other information. CANPX Corporation as established and organized at the date this Regulationbecomes effective shall be deemed to have been recognized by the Board of Directors and be an organization which provides for market transparency for thepurposes of this Regulation 2100.4(d). "
In approving IDA Regulation 2100.4(d) the Commission imposed a condition that the IDA must provide an opportunity to other parties to displace orsupplement CANPX Corporation ("CANPX") as a recognized market transparency organization at any time, by demonstrating to the IDA Board of Directorsthat the party can perform transparency-related services as effectively as CANPX.
CANPX is a corporation formed by the IDA and the IDBA. If CANPX remains the only RMTO, all inter-dealer bond brokers will be required to provideCANPX with their current price information in respect of specified Government of Canada bonds. CANPX will then provide a composite feed of suchinformation to its subscribers on a continuous basis showing current prices for the specified bonds without attribution of the quoted prices to a specific inter-dealer bond broker.
Reuters applied to the IDA for recognition as a market-transparency organization that could perform transparency-related services as effectively as CANPX andhence for recognition as a RMTO under IDA Regulation 2100.4(d). Reuters' application was heard by a sub-committee of the Board of Directors of the IDA onNovember 15, 1996. The sub-committee concluded that Reuters could not perform transparency-related services as effectively as CANPX and should notbecome a RMTO. The Board of Directors of the IDA agreed with this conclusion and so indicated in its decision of January 15, 1997.
A preliminary hearing was convened by the Commission on March 21, 1997 to make determinations on preliminary matters in connection with the hearing andreview then set down for April 14 and 15, 1997. The issues brought before the panel were:
1. Should the hearing and review proceed as a hearing de novo or be based on the record before the IDA hearing, supplemented by such additional evidence asthe panel might permit?
2. What degree of deference to the decision of the IDA should be shown by the Commissioners in reaching their decision? Should the panel hearing the mattermake a separate determination of the issue before the IDA hearing or should the Commission interfere with the IDA decision only on the grounds described inthe decision in In the Matter of Canada Malting Co. Ltd. (1986), 9 OSCB 3565?
3. Who should be recognized as full parties to the hearing and review and should intervenor status be granted to other interested persons?
Our Decision on these issues was released March 24, 1997 and is attached to these Reasons.
Prior to the formation of CANPX, the preparation of IDA Regulation 2100.4(d) and approval thereof, with conditions, by the Commission, Reuters and Cantorentered into an agreement whereby Cantor would provide its bond pricing information exclusively to Reuters, which would in turn include that information in itsinternational distribution of bond pricing information to its subscribers. In distributing that information, Reuters would identify Cantor as the source.
In considering the submissions on standing, the hearing panel concluded that Cantor is not "directly affected by, or by the administration of," the decision of theIDA under review within the meaning of subsection 21.7(1) of the Act and is accordingly not entitled to apply to the Commission for a hearing and review ofthat decision. Cantor, and certain other interested parties, would, however, be entitled to intervenor status, on a "Torstar" basis, in the hearing and reviewrequested by Reuters, i.e. they would not be entitled to lead evidence or cross-examine witnesses, but would be permitted to make submissions during the closingarguments.
Cantor has applied to the Divisional Court for judicial review of this part of the Decision of the Commission dated March 24, 1997, an order setting aside thatDecision with respect to the finding that Cantor is not directly affected by the IDA decision of January 15, 1997 and a declaration that Cantor is directly affectedby the IDA decision and is entitled to apply to the Commission for hearing and review of the IDA decision pursuant to sub-section 21.7(1) of the Act.
These Reasons are being issued at this time so that the Divisional Court can have before it our reasons for denying Cantor full standing at the hearing and review,and do not deal with the other issues raised at the preliminary hearing. Reasons in respect of these other issues will be provided at a later date.
Mr. Campbell, on behalf of Cantor, submitted that Cantor was directly affected by the decision of the IDA, and hence entitled to full standing.
He argued that as a practical matter Cantor cannot continue to do business in Ontario unless it is approved by the IDA as an inter-dealer broker. To continue tohave such approval, Cantor will be required under Regulation 2100.4(d) to provide its pricing information to CANPX or another RMTO. Providing suchinformation to CANPX would be in conflict with the exclusivity requirement in Cantor's contract with Reuters. Cancellation of the Reuters' contract wouldhave a direct economic effect on Cantor. We asked that Mr. Campbell provide us with a copy of that contract or abstracts from it or other materialsdemonstrating that cancellation of the Reuters' contract would be a result of Cantor providing bond pricing information to CANPX. He indicated that the termsof the Cantor agreement with Reuters were confidential. When we decided that any material submitted in this regard would be seen only by us, he agreed toobtain instructions on the request. Counsel for Reuters asked that this material should not be submitted until he had had an opportunity to take instructions aswell.
Mr. Campbell also submitted that requiring Cantor to submit its data to CANPX is tantamount to "expropriation" of the data. If Reuters had been approved asan RMTO Cantor would not be forced to give the data to CANPX. Therefore, he argued, having to give the data to CANPX was an economic consequence toCantor of the IDA decision.
Mr. Campbell submitted that Cantor was more directly affected than the minority shareholders in Canada Malting, referred to below, who were granted fullstanding by the Commission. That decision involved an appeal by a group of minority shareholders of Canada Malting Co. Limited to the Commission from adecision of The Toronto Stock Exchange ("TSE") to accept a notice for filing under by-law 19.06 relating to the issuance by the company of 500,000 commonshare to its two largest shareholders. The private placement increased the combined shareholdings of these shareholders from 28.3% to 39.7% which, inter alia,effectively precluded a take-over bid for the company. The TSE had the power to require shareholder approval of this transaction but did not do so. TheCommission accepted submissions of counsel for the minority shareholders that the latter were directly affected by the TSE decision not to require suchapproval.
Finally, Mr. Campbell submitted that Cantor had been directly involved not only in the IDA hearing but also in the events leading up to the enactment ofRegulation 2100.4(d) and the conditions imposed thereon by the Commission. He argued that it would be inappropriate to reduce Cantor's role in the hearingand review of the IDA decision to that of an intervener.
On the question of the appropriate standing to be accorded Cantor, Mr. Longo on behalf of Star Data submitted that they did not view the denial of Reuters'application by the IDA as taking away from Reuters or Cantor Fitzgerald any rights that they presently had. He argued that the denial did not undermine, in anyway, the arrangements between Reuters and Cantor Fitzgerald.
Mr. Wardle, on behalf of Reuters, argued that Cantor was in an analagous position to that of Reuters in this case because it had a direct contractual relationshipwith Reuters.
Mr. Tory, on behalf of the IDA, pointed out that the only information available as to the terms of the contract between Cantor and Reuters was that Cantor hadsold its data to Reuters on an exclusive basis. He submitted that on that contractual basis, Cantor did not have a direct interest in Reuters' application to theIDA. The data that is the subject of the contract between Cantor and Reuters belongs to Reuters. The transmission of that data to CANPX was a matter ofconcern for Reuters and not for Cantor.
Mr. Sorell, on behalf of the IDBA, put forward the view that the IDA and Reuters were the "principally entitled parties" and should be the only ones entitled tocall evidence and that the other parties should be granted only intervener status.
Mr. Moseley, on behalf of Staff, took the position that the parties represented, other than IDA, Reuters and Staff, should be given "Torstar-type" standing butthat none of these parties, including Cantor in particular, should be given full standing. Mr. Moseley referred to In the Matter of Instinet Corporation (1995),18 OSCB 5439 and In the Matter of George Albino (1991), 14 OSCB 365, both quoted below. In his view these decisions made it clear that "directly affected"means what it says and that an indirect effect is not enough to give a party full standing. Mr. Moseley acknowledged that Albino in particular did not make itclear what the difference is between a direct and indirect economic impact.
In reply to Mr. Campbell's submission, Mr. Tory compared the situation in these proceedings to that in Instinet. In that case, the TSE and other organizationsapplied for a hearing and review of a decision of the Director of the Commission to register Instinet Corporation, and submitted that they were directly affectedby that decision. Mr. Tory said that the Commission denied that application because the effects on the applicants were speculative and that the alleged effect onthe applicants required intervening events rather than being a direct result of the decision. He argued that, in the present case, the effect on Cantor depends onhow Reuters proceeds in its future activities and is hence speculative and indirect.
In response, Mr. Campbell stated that, as a result of the IDA decision, CANPX is "the only game in town". CANPX is the only RMTO which can receiveCantor's data and that is a direct effect of the IDA's decision. Mr. Campbell also drew attention to the fact that subsection 21.7(1) of the Act now refers notonly to a person or company directly affected by a decision of a recognized self-regulatory organization but also to a person directly affected by theadministration of such a decision. This is broader language than before.
The position of the Commission on entitlement to standing has developed over a number of years.
In the Matter of Zenmac Explorations Limited (1982), 4 OSCB 542C was a hearing convened to decide whether a temporary cease trade order should be madepermanent. A substantial shareholder applied for standing to intervene on the basis that he was directly affected by the cease trade order. The Commissiondenied the application, stating:
"To grant the Applicants status, that is to permit the intervention as a party of someone who might be perceived as being a second prosecutor, would not beappropriate."
The Commission considered that the decision in Zenmac was directly applicable in In the Matter of Electra Investments (Canada) Limited (1983), 5 OSCB 1C.Electra Investments (Canada) Limited ("Electra") had made a take-over bid for the shares of Energy and Precious Metal Inc. ("EPM") without complying withthe Act. As to granting status to EPM, the Commission said:
"Section 124 proceedings are adversarial in nature and prosecution of the complaints is in the hands of staff counsel. In our view, the other parties to theproceedings are the individuals and persons against whom the proceedings are directed. To grant EPM status, which is to permit the intervention as a party ofsomeone who might be perceived as being a second prosecutor, would not be appropriate. Indeed, staff counsel should be viewed as adequately representing theinterest of EPM and its shareholders insofar as section 124 of the Act is concerned."
In the Matter of Torstar Corporation and Southam Inc. (1985), 8 OSCB 5068 was a disciplinary hearing to consider whether certain exemptions in the Actshould be removed from certain directors of Torstar Corporation ("Torstar") and Southam Inc. ("Southam") because of an exchange of shares between Torstarand Southam without compliance with the General By-law of the TSE. The TSE and four other parties representing significant shareholder groups applied forstanding to intervene.
The majority of the panel of the Commission, in granting the applicants standing to intervene to render assistance to Commission by way of argument, stated inreference to Zenmac and Electra:
"We would, however, take this opportunity to observe that the holdings in those cases as to standing to intervene in a disciplinary hearing may have been overlybroad."
The majority referred to the then new Rule 13.02 of the Ontario Rules of Civil Procedure, stating:
"Rule 13.02 reads as follows:
"Any person may, with leave of a Judge or at the invitation of the presiding Judge or Master, and without becoming a party to the proceedings, intervene as afriend of the court for the purpose of rendering assistance to the court by way of argument."
We are of the opinion that the principle of Rule 13.02 can usefully be adapted by administrative tribunals such as the OSC, notwithstanding that the OSC isgoverned by the Statutory Powers Procedure Act, R.S.O. 1980, c.484. The applicants here, including the TSE, would be adequately served by allowing them tointervene without becoming a party to the proceedings, in order to assist the Commission by way of argument. That argument would go as to the appropriatesanction and would be based on the statements of fact placed before the tribunal by Torstar and Southam, and such other facts as may be adduced at thehearing."
The standing thus granted has since been referred to generally as "Torstar-type" standing.
The majority decision in Torstar did not address whether the applicants should be granted full standing. The dissenting reasons of Vice-Chairman, CharlesSalter, Q.C., concluded that the applicants should be granted full standing, stating:
"We may well anticipate that the shareholder applicants, if afforded full standing, will lead evidence and advance arguments regarding the Torstar-Southamexchange of shares and thereby seek to characterize the transaction as offensive and contrary to public policy in the circumstances of the case. If theirintervention is to be allowed - and I would allow it - it is in my view preferable that such evidence be led and arguments made by the shareholder applicants'counsel directly rather than secondhand through staff counsel. Direct participation by them will better serve to reinforce investors' readiness to take action indefence of perceived threats to their interests."
As indicated above, Canada Malting was an application under then subsection 22(3) of the Act by a group of minority shareholders for a hearing and review inrespect of a TSE decision to accept a notice for filing under TSE By-law 19.06 relating to the issuance of 500,000 shares of the company to its two largestshareholders, The Molson Companies Ltd. and Ogilvie Mills Ltd. The TSE had the power to require the approval of a majority of the minority shareholders forthe share issuance but did not do so. As a result of the issuance, the percentage holding of the majority shareholders increased from 28.3% to 39.7%. Theapplicants argued that this removed the possibility of a take-over bid premium for their shares and would result in a decline in market price, which in factoccurred.
Subsection 22(3) of the Act gave a right to apply for a hearing and review of a decision of a stock exchange in Ontario to persons directly affected by suchdecision. The Commission concluded that the applicants were directly affected by the decision of the TSE, stating:
"Those whose rights or whose economic interests have been affected by decisions of the TSE under By-law 19.06 are, in our view, persons who are "directlyaffected" by a decision of the TSE. If minority shareholders in a company that is asking for approval under By-law 19.06 are not affected when their company ismaking a large share issuance to major shareholders in which they are not invited to participate, then it is hard to think of a case in which shareholders would be"directly affected".
Albino involved an application for standing in a disciplinary case by a law firm on behalf of itself and unnamed clients. The application was denied. In presentingthe reasons of a majority of the panel of the Commission on the question of standing (the third Commissioner concluded that the alleged misconduct was outsidethe jurisdiction of the Commission), Vice-Chairman Salter noted that "it might be useful at this time to draw together the Commission's several decisions onmatters of standing". After reviewing a number of Commission decisions, he stated:
"In conclusion, it seems to us that on requests for standing the Commission must first and foremost consider the nature of the issue and the likelihood thatintervenors will be able to make a useful contribution without injustice to the immediate parties (the MacMillan Bloedel test, adopted in Torstar). Where awould-be intervenor has a direct financial interest, in that that person may acquire a benefit or incur a loss as an immediate result of a Commission decision, fullstanding is appropriate. The clearest application of that principle is to security holders and to those who have announced an intention (i.e., offerors in take-overbids) to acquire securities. Where the intending intervenor has a clear financial interest - most obviously, as a holder of securities of the subject issuer - but thatinterest will not be immediately affected by the decision the Commission may make, then only restricted (i.e., Torstar) standing is to be granted, as in section 124proceedings such as Torstar itself."
Instinet is the most recent Commission decision on the subject of standing. In that case several self-regulatory organizations ("SROs") applied to theCommission for, inter alia, a hearing and review of a decision of the Director of the Commission to grant registration under the Act to Instinet as aninternational dealer. Section 8(2) of the Act gives persons directly affected by a decision of the Director a right to so apply. The SROs claimed to be directlyaffected because of likely fragmentation of the market, a reduction in the SROs' ability to achieve reciprocity in the United States, the apparent failure of Instinetto meet certain conditions for registration and the admission to the capital market of a potentially significant participant not subject to meaningful capitalrequirements.
The Commission concluded that the SROs were not directly affected by the Director's decision. In its reasons the Commission addressed several aspects of theappropriate determination of direct effect. The Commission noted that:
"The words "directly affected" in subsection 8(2) of the Act should be interpreted in light of all of the relevant circumstances. The interpretation to be given tothe words in the context of a decision relating to a take-over bid may well be different than in the context of a registration decision. In each case undersubsection 8(2), in determining standing, the Commission must look at the nature of the power that was exercised, the decision that was made, the nature of thecomplaint being made by the person requesting the hearing and review and the nature of that person's interest in the matter."
"We have also considered the nature of the complaint of the SROs and their interest in the Director's decision in determining whether they should have standingunder subsection 8(2) of the Act. Even if we were to accept what we view as the most significant argument of the SROs, that the registration of Instinet U.S. islikely to lead to fragmentation of the Canadian markets, we do not believe that the Canadian exchanges are "directly affected" by the decision.
We note that the relevant part of the definition of "directly" in the Oxford dictionary is "without the intervention of a medium; immediately; by a direct process ormode." The Oxford dictionary includes in the definition of "indirect", "not directly aimed at or attained; not immediately resulting from an action or cause."
"If the Canadian exchanges are affected by the Director's decision to register Instinet U.S., in our view they are only indirectly affected. In order to be "directlyaffected" in the registration context, the Director's decision to register Instinet U.S. would have to be the cause of fragmentation. The main concern of theCanadian exchanges appeared to be that if institutional investors see a better price on the Instinet screen for securities that are listed on one of those exchanges,they may take steps to trade them through the Instinet system outside of Canada. In the event that any fragmentation occurs, which is at this stage speculative, itwould require a number of intervening steps, including actions outside the control of Instinet U.S. by investors."
ANALYSIS AND DECISION
Subsection 21.7(1) of the Act states that "a person or company directly affected by, or by the administration of, a direction, decision, order or ruling made undera by-law, rule, regulation, policy, procedure, interpretation or practice of ...... a recognized self-regulatory organization .... may apply to the Commission for ahearing and review of the direction, decision order or ruling".
It is clear to us from the wording of Subsection 21.7(1) and a review of the decisions described above that the primary question to be determined in dealing withCantor's application for full standing in respect of the hearing and review is whether Cantor is directly affected by the IDA decision or the administration thereof.
Cantor has submitted that it has been directly affected and will suffer adverse economic consequences as a result of the IDA decision because:
1. there will be a conflict with Cantor's contractual obligation to provide its bond trading data exclusively to Reuters; and
2. the requirement to provide its bond trading data free of charge to CANPX is effective "expropriation" of its data.
As we requested, subsequent to the hearing Cantor provided us with documents stated to support Cantor's position that a requirement to provide its data toCANPX had direct economic consequences for Cantor because of the effect of such requirement on its arrangements with Reuters. In our view, this briefdocumentation did not demonstrate that the IDA's decision would have an immediate or automatic effect on Cantor's contractual arrangements with Reuters. Itis not clear to us that Reuters will be entitled to terminate these contractual arrangements because Cantor will be required to supply information to CANPX foruse on a non-attributed basis. If there is something in the contractual arrangements that would lead to this result, Cantor did not choose to include this in thematerial which it supplied to us. Nor is it clear to us that Reuters will attempt to terminate the contractual arrangement. Reuters argues that attributed data ismore valuable than unattributed data. It may be that actions taken by Reuters in the future may adversely affect Cantor, but such effect is, based on theinformation before us, speculative and contingent on future actions of Reuters or others. In the absence of such actions, Reuters will continue to receiveCantor's bond trading data and be able to make it available, on an attributed basis, to its subscribers. The data to be provided to CANPX will be provided to itssubscribers on an unattributed basis in a composite screen that includes data from a number of other inter-dealer brokers.
The requirement arising from IDA Regulation 2100.4(d) that, in the absence of another RMTO, approved inter-dealer brokers provide their bond trading data toCANPX is not unique to Cantor. It applies to every inter-dealer broker. Further, that requirement does not prevent Cantor or any other inter-dealer broker fromdealing with its data in any way that it previously could. The data may still be sold or distributed or effectively kept confidential from competitors. Because thecomposite information provided by CANPX does not identify the individual sources of the information, only CANPX, which is not a competitor, will be able toidentify the sources of the data it distributes. Cantor may not be able to deal freely with its data in the future, but that is a result of its contract with Reuters andnot of the requirement to provide its data to CANPX.
Nor do we accept Cantor's argument that it will suffer an "expropriation". Cantor's data has been "expropriated" only in the sense that it would prefer toprovide its data only to Reuters. Like the other approved inter-dealer brokers, Cantor will, in the absence of another RMTO if Reuters fails to convince theCommission that the IDA decision should be set aside, be required to make information available to CANPX for use on a consolidated non-attributed basis forthe benefit of the investing public. It will continue to be able to deal with this information in any other manner it chooses. We do not consider this IDArequirement to constitute "expropriation". Nor do we see it as forming a basis for concluding that Cantor is directly affected by the IDA decision or theadministration of that decision.
In his submissions on behalf of Cantor, Mr. Campbell stressed that the recent amendments to subsection 21.7(1) of the Act included among those entitled toapply for a hearing and review persons directly affected by the administration of a decision of a self-regulatory organization. He stated that this amendmentbroadened the criteria for entitlement to apply for a hearing and review.
It seems incontrovertible that this amendment has broadened the criteria by adding another action, or lack thereof, by a self-regulatory organization that may giverise to an application for a hearing and review. However, it does not seem to us that this alters the substance of the requirements. If a person may be directlyaffected by a decision of a self-regulatory organization logically he or she may also be affected by how that decision is administered. Recognizing this in thewording of the subsection is not a material change to the thrust of the section. Also, Mr. Campbell did not explain how Cantor could be said to be affected bythe administration of the IDA decision as opposed to being affected by the decision itself.
Finally, Mr. Campbell submitted that Cantor had been heavily involved in past deliberations on the subject of market transparency including the appropriatenessof IDA Regulation 2100.4(d) and the IDA hearing. He argued that it would be inappropriate, given the history of Cantor's involvement, to limit it to "Torstar-type" status in respect of this hearing and review.
Without downplaying the role played by Cantor in the prior debate over transparency in the bond market, we do not believe its prior role should determine itsability to have full standing in this hearing and review. The issue before the hearing and review is whether the Commission should interfere with the IDAdecision and, if so, how. The issue of full standing must be determined by reference to that issue and whether parties have been directly affected by that decision,or its administration.
On the basis of the tests enunciated in Albino and Instinet (which we consider to be equally applicable in proceedings under subsection 21.7(1) of the Act) wehave concluded that Cantor is not entitled to full standing, but should receive "Torstar-type" standing in these proceedings, which call into question a decisionmade by an SRO. There is no convincing evidence before us that Cantor has a direct financial interest in the IDA's decision or that Cantor is likely to acquire abenefit or incur a loss as an immediate result of that decision or the Commission's decision in these proceedings. Nor, as we have found, is Cantor directlyaffected by the decision or the administration of that decision, or likely to be so affected in the future. Considering the nature of the power exercised by the IDAin connection with its decision, the actual decision, the nature of the complaint being made by Cantor, and the nature of the interest in this matter, we haveconcluded that it is not entitled to apply for a hearing and review of the IDA's decision under subsection 21.7(1) of the Act, and is not entitled to full standing inthese proceedings.
However, we have concluded that it is likely that Cantor will be able to make a useful contribution without injustice to the immediate parties, and that it shouldtherefore be granted "Torstar-type" standing in these proceedings.
We came to the same conclusion with respect to the other applicants before us for the grant of "Torstar-type" standing.
April 21st, 1997.
"J. A. Geller"
"Morley P. Carscallen"