Securities Law & Instruments

Headnote

Application under section 144 of the Act to vary and restate an order recognizing CNSX Markets Inc. as a stock exchange.

Applicable Legislative Provision

Securities Act, R.S.O. 1990, c. S.5, as am., ss. 21, 144.

IN THE MATTER OF

THE SECURITIES ACT, R.S.O. 1990,

CHAPTER S.5, AS AMENDED

(the "Act")

AND

IN THE MATTER OF

CNSX MARKETS INC.

VARIATION TO RECOGNITION ORDER

(Section 144 of the Act)

WHEREAS the Commission issued an order dated February 28, 2003, recognizing the Canadian Trading and Quotation System Inc. (CNQ) as a quotation and trade reporting system (QTRS) pursuant to section 21 of the Act (CNQ QTRS Recognition Order);

AND WHEREAS the Commission issued an order dated May 7, 2004, as varied on September 9, 2005, June 13, 2006, and May 16, 2008, granting recognition to CNQ as a stock exchange pursuant to section 21 of the Act and revoking the CNQ QTRS Recognition Order pursuant to section 144 of the Act (CNQ Exchange Recognition Order);

AND WHEREAS CNQ changed its name to CNSX Markets Inc. (CNSX Markets) on November 4, 2008;

AND WHEREAS the Commission has determined that it is not prejudicial to the public interest to issue this order that varies and restates the CNQ Exchange Recognition Order to reflect the name change, update the financial viability and systems-related terms and conditions, add an outsourcing term and condition, update Schedule A, Appendix C relating to eligible issuers, and make certain additional amendments;

IT IS ORDERED, pursuant to section 144 of the Act, that the CNQ Exchange Recognition Order be varied and restated as follows:

IN THE MATTER OF

THE SECURITIES ACT, R.S.O. 1990,

CHAPTER S.5, AS AMENDED

(the "Act")

AND

IN THE MATTER OF

CNSX MARKETS INC.

RECOGNITION ORDER

(Section 21 of the Act)

WHEREAS the Commission issued an order dated February 28, 2003, recognizing the Canadian Trading and Quotation System Inc. (CNQ) as a quotation and trade reporting system (QTRS) pursuant to section 21 of the Act (CNQ QTRS Recognition Order);

AND WHEREAS the Commission issued an order dated May 7, 2004, as varied on September 9, 2005, June 13, 2006, and May 16, 2008, granting recognition to CNQ as a stock exchange pursuant to section 21 of the Act and revoking the CNQ QTRS Recognition Order pursuant to section 144 of the Act (CNQ Exchange Recognition Order);

AND WHEREAS CNQ changed its name to CNSX Markets Inc. (CNSX Markets) on November 4, 2008;

AND WHEREAS CNSX Markets operates the Canadian National Stock Exchange (CNSX) and the Alternative Market facility, Pure Trading (Pure):

AND WHEREAS CNSX Markets has made an application (Application) to continue its recognition under a varied and restated recognition order to reflect the name change, update the financial viability and systems-related terms and conditions, add an outsourcing term and condition; update Schedule A, Appendix C relating to eligible issuers and make certain additional amendments (collectively, the Amendments);

AND WHEREAS the Commission has received certain representations and undertakings from CNSX Markets in connection with the Application;

AND WHEREAS CNSX Markets will continue to comply with National Instrument 21-101 Marketplace Operation and National Instrument 23-101 Trading Rules;

AND WHEREAS the Commission considers it appropriate to set out in this order the terms and conditions of CNSX Markets' continued recognition as a stock exchange, which terms and conditions are set out in Schedule A;

AND WHEREAS CNSX Markets has agreed to the terms and conditions set out in Schedule A;

AND WHEREAS the Commission is of the opinion that the continued recognition of CNSX Markets as a stock exchange, subject to the terms and conditions set out in Schedule A would not be prejudicial to the public interest;

THE COMMISSION HEREBY continues to recognize CNSX Markets as a stock exchange pursuant to section 21 of the Act, subject to the terms and conditions set out in Schedule A.

DATED May 7, 2004, as varied on September 9, 2005, June 13, 2006, May 16, 2008 and as varied and restated on July 6, 2010.

"James E. A. Turner"

"Carol S. Perry"

 

SCHEDULE A

TERMS AND CONDITIONS

1. CORPORATE GOVERNANCE

1.1 CNSX Markets' arrangements with respect to the appointment, removal from office and functions of the persons ultimately responsible for making or enforcing the rules, policies and other similar instruments (Rules) of CNSX Markets, namely, the board of directors (Board), are such as to ensure a proper balance between the interests of the different entities desiring access to the facilities of CNSX Markets (CNSX Dealers) and companies seeking to be listed on CNSX (CNSX Issuers), and a reasonable number and proportion of directors are "independent" in order to ensure diversity of representation on the Board. An independent director is a director that is not:

(a) an associate, director, officer or employee of a CNSX Dealer;

(b) an officer or employee of CNSX Markets or its affiliates;

(c) an associate, director, officer or employee of any person or company who owns or controls, directly or indirectly, over 10% of CNSX Markets; or

(d) a person who owns or controls, directly or indirectly, over 10% of CNSX Markets.

In particular, CNSX Markets will ensure that at least fifty per cent (50%) of its directors are independent. In the event that at any time CNSX Markets fails to meet such requirement, it will promptly remedy such situation.

1.2 Without limiting the generality of the foregoing, CNSX Markets' governance structure provides for:

(a) fair and meaningful representation on its Board, in the context of the nature and structure of CNSX Markets, and any governance committee thereto and in the approval of Rules;

(b) appropriate representation of independent directors on any CNSX Markets Board committees; and

(c) appropriate qualifications, remuneration, conflict of interest provisions and limitation of liability and indemnification protections for directors and officers and employees of CNSX Markets generally.

2. FITNESS

2.1 In order to ensure that CNSX Markets operates with integrity and in the public interest, CNSX Markets will take reasonable steps to ensure that each person or company that owns or controls, directly or indirectly, more than 10% of CNSX Markets and each officer or director of CNSX Markets is a fit and proper person and the past conduct of each person or company that owns or controls, directly or indirectly, more than 10% of CNSX Markets and each officer or director of CNSX Markets affords reasonable grounds for belief that the business of CNSX Markets will be conducted with integrity.

3. FAIR AND APPROPRIATE FEES

3.1 Any and all fees imposed by CNSX Markets will be equitably allocated. Fees will not have the effect of creating barriers to access and must be balanced with the criterion that CNSX Markets will have sufficient revenues to satisfy its responsibilities.

3.2 CNSX Markets' process for setting fees will be fair, appropriate and transparent.

4. ACCESS

4.1 CNSX Markets' requirements will permit all properly registered dealers that are members of a recognized SRO and satisfy access requirements established by CNSX Markets to access the facilities of CNSX Markets.

4.2 Without limiting the generality of the foregoing, CNSX Markets will:

(a) establish written standards for granting access to CNSX Dealers trading on its facilities;

(b) not unreasonably prohibit or limit access by a person or company to services offered by it; and

(c) keep records of:

(i) each grant of access including, for each CNSX Dealer, the reasons for granting such access, and

(ii) each denial or limitation of access, including the reasons for denying or limiting access to any applicant.

5. FINANCIAL VIABILITY

5.1 CNSX Markets will maintain sufficient financial resources for the proper performance of its functions.

5.2 CNSX Markets will deliver to Commission staff its annual financial budget, together with the underlying assumptions, that has been approved by its Board, within 30 days after the commencement of each fiscal year. Such financial budget should include monthly projected revenues, expenses and cash flows.

5.3 CNSX Markets shall calculate monthly the following financial ratios:

(a) a current ratio, being the ratio of current assets to current liabilities;

(b) a debt to cash flow ratio, being the ratio of total debt (including any line of credit draw downs, and the current and long-term portions of any loans, but excluding accounts payable, accrued expenses and other liabilities) to EBITDA (or earnings before interest, taxes, stock based compensation, depreciation and amortization) for the most recent 12 months; and

(c) a financial leverage ratio, being the ratio of total assets to shareholders' equity,

in each case following the same accounting principles as those used for the audited financial statements of CNSX Markets.

5.4 CNSX Markets will report quarterly (along with the financial statements required to be delivered pursuant to section 10.1) to Commission staff the monthly calculations for the previous quarter of the financial ratios as required to be calculated under section 5.3.

5.5 Depending on the results of the calculations under section 5.3, CNSX Markets may be required to provide additional reporting as set out below.

(a) If CNSX Markets determines that it does not have, or anticipates that, in the next twelve months, it will not have:

(i) a current ratio of greater than or equal to 1.1/1,

(ii) a debt to cash flow ratio of less than or equal to 4.0/1, or

(iii) a financial leverage ratio of less than or equal to 4.0/1,

it will immediately notify Commission staff of the above ratio(s) that it is not maintaining, the reasons, along with an estimate of the length of time before the ratio(s) will be maintained.

(b) Upon receipt of a notification made by CNSX Markets pursuant to paragraph (a), the Commission or its staff may, as determined appropriate, impose terms or conditions on CNSX Markets, which may include any of the terms and conditions set out in paragraphs 5.6(b) and (c).

5.6 If CNSX Markets' current ratio, debt to cash flow ratio or financial leverage ratio falls below the levels outlined in subparagraphs 5.5(a)(i), (ii) and (iii) above for a period of more than three months, CNSX Markets will:

(a) immediately deliver a letter advising Commission staff of the reasons for the continued ratio deficiencies and the steps being taken to rectify the situation;

(b) deliver to Commission staff, on a monthly basis, within 30 days of the end of each month:

(i) unaudited monthly financial statements and a status update on any pending capital raising transaction(s) including the amount, terms and name(s) of individuals/entities that have committed to providing funding and their commitment,

(ii) a comparison of the monthly revenues and expenses incurred by CNSX Markets against the projected monthly revenues and expenses included in CNSX Markets' most recently updated budget for that fiscal year,

(iii) for each revenue item whose actual was significantly lower than its projected amount, and for each expense item whose actual was significantly higher than its projected amount, the reasons for the variance, and

(iv) a calculation of the current ratio, debt to cash flow ratio and financial leverage ratio for the month;

(c) prior to making any type of payment to any director, officer, related company or shareholder that is in excess of the amount included in the most recent annual financial budget delivered to Commission staff, demonstrate to the satisfaction of Commission staff that it will have sufficient financial resources to continue its operations after the payment; and

(d) adhere to any additional terms or conditions imposed by the Commission or its staff, as determined appropriate, on CNSX Markets,

until such time as CNSX Markets has maintained each of its current ratio, debt to cash flow ratio and financial leverage ratio at the levels outlined in subparagraphs 5.5(a)(i), (ii) and (iii) for a period of at least 6 consecutive months.

6. REGULATION

6.1 CNSX Markets will maintain its ability to perform its regulation functions including setting requirements governing the conduct of CNSX Dealers and CNSX Issuers and disciplining CNSX Dealers and CNSX Issuers, whether directly or indirectly through a regulation services provider.

6.2 CNSX Markets will continue to retain the Investment Industry Regulatory Organization of Canada (IIROC, the successor to Market Regulation Services Inc.) as a regulation services provider to provide certain regulation services which have been approved by the Commission. CNSX Markets will provide to the Commission, on an annual basis, a list outlining the regulation services performed by IIROC and the regulation services performed by CNSX Markets. All amendments to those listed services are subject to the prior approval of the Commission.

6.3 CNSX Markets will provide the Commission with an annual report with such information regarding its affairs as may be requested from time to time. The annual report will be in such form as may be specified by the Commission from time to time.

6.4 CNSX Markets will perform all other regulation functions not performed by its regulation services provider.

6.5 Management of CNSX Markets (including the President) will at least annually assess the performance by its regulation services provider of its regulation functions and report to the Board, together with any recommendations for improvements. CNSX Markets will provide the Commission with copies of such reports and will advise the Commission of any proposed actions arising therefrom.

6.6 CNSX Markets will provide the Commission with the information set out in Appendix A, as amended from time to time.

7. CAPACITY AND INTEGRITY OF SYSTEMS

7.1 CNSX Markets will maintain, in accordance with prudent business practice, reasonable controls to ensure capacity, integrity requirements and security of its technology systems.

8. PURPOSE OF RULES

8.1 CNSX Markets will establish Rules that are necessary or appropriate to govern and regulate all aspects of its business and affairs.

8.2 More specifically, CNSX Markets will ensure that:

(a) the Rules are designed to:

(i) ensure compliance with securities legislation,

(ii) prevent fraudulent and manipulative acts and practices,

(iii) promote just and equitable principles of trade,

(iv) foster cooperation and coordination with persons or companies engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in, securities, and

(v) provide for appropriate discipline;

(b) the Rules do not:

(i) permit unreasonable discrimination among CNSX Issuers and CNSX Dealers, or

(ii) impose any burden on competition that is not necessary or appropriate in furtherance of securities legislation; and

(c) the Rules are designed to ensure that its business is conducted in a manner so as to afford protection to investors.

9. RULES AND RULE-MAKING

9.1 CNSX Markets will comply with the rule review process set out in Appendix B, as amended from time to time, concerning Commission approval of changes to its Rules.

10. FINANCIAL STATEMENTS

10.1 CNSX Markets will file unaudited quarterly financial statements within 60 days of each quarter end and audited annual financial statements within 90 days of each year end.

11. DISCIPLINARY POWERS

11.1 CNSX Markets will have general disciplinary and enforcement provisions in its Rules that will apply to any person or company subject to its regulation.

11.2 CNSX Markets will ensure, through IIROC and otherwise, that any person or company subject to its regulation is appropriately sanctioned for violations of the Rules. In addition, CNSX Markets will provide notice to the Commission of any violations of securities legislation of which it becomes aware in the ordinary course of its business.

12. DUE PROCESS

12.1 CNSX Markets will ensure that its requirements relating to access to its facilities, the imposition of limitations or conditions on access and denial of access are fair and reasonable, including in respect of giving notice, giving parties an opportunity to be heard or make representations, keeping records, giving reasons and providing for appeals of its decisions.

13. INFORMATION SHARING

13.1 CNSX Markets will share information and otherwise co-operate with the Commission and its staff, the Canadian Investor Protection Fund, other Canadian exchanges and recognized self-regulatory organizations and regulatory authorities responsible for the supervision or regulation of securities firms and financial institutions, subject to the applicable privacy or other laws about the sharing of information and the protection of personal information.

14. ISSUER REGULATION

14.1 CNSX Markets will ensure that only the issuers set out in Appendix C, as amended from time to time, are eligible for listing on CNSX.

14.2 CNSX Markets may, in accordance with the requirements for qualification for trading on Pure set out in its Rules, designate certain listed securities as eligible for trading on Pure without approving such securities for an additional listing.

14.3 CNSX Markets has and will continue to ensure that it has sufficient authority over its CNSX listed issuers.

14.4 CNSX Markets will carry out appropriate review procedures to monitor and enforce listed issuer compliance with the Rules.

14.5 CNSX Markets will amend its Policies and Forms, from time to time, at the request of the Director, Corporate Finance, to reflect changes to the disclosure requirements of Ontario securities law.

15. CLEARING AND SETTLEMENT

15.1 The Rules impose a requirement on CNSX Dealers to have appropriate arrangements in place for clearing and settlement through a clearing agency recognized by the Commission under the Act.

16. MARKETPLACE REGULATORY REQUIREMENTS

16.1 CNSX Markets will comply with the requirements set out in National Instrument 21-101 Marketplace Operation and in National Instrument 23-101 Trading Rules.

17. OUTSOURCING

17.1 In any material outsourcing of any of its business functions to a third party, CNSX Markets will proceed in accordance with industry best practices. Without limiting the generality of the foregoing, CNSX Markets will:

(a) establish and maintain policies and procedures that are approved by its Board for the evaluation and approval of such material outsourcing arrangements;

(b) in entering into any such material outsourcing arrangement:

(i) assess the risk of such arrangement, the quality of the service to be provided and the degree of control to be maintained by CNSX Markets, and

(ii) execute a contract with the service provider addressing all significant elements of such arrangement, including service levels and performance standards;

(c) ensure that any contract implementing such material outsourcing arrangement that is likely to impact on CNSX Markets' regulation functions provide for CNSX Markets, its agents and the Commission to be permitted to have access to and to inspect all data and information maintained by the service provider that CNSX Markets is required to share under section 13.1 or that is required for the assessment by the Commission of the performance of CNSX Markets of its regulation functions and the compliance of CNSX Markets with the terms and conditions in this Schedule A; and

(d) monitor the performance of the service provided under such material outsourcing arrangement.

18. ADDITIONAL INFORMATION

18.1 CNSX Markets will provide the Commission with any additional information the Commission may require from time to time.

 

Appendix A

Reporting Obligations

1. Quarterly Reporting on Exemptions or Waivers Granted

On a quarterly basis, CNSX Markets will submit to the Commission a report summarizing all exemptions or waivers granted pursuant to the rules, policies or other similar instruments (Rules) to any CNSX Dealer or CNSX Issuer during the period. This summary should include the following information:

(a) The name of the CNSX Dealer or CNSX Issuer;

(b) The type of exemption or waiver granted during the period;

(c) The date of the exemption or waiver; and

(d) A description of CNSX Markets staff's reason for the decision to grant the exemption or waiver.

2. Quarterly Reporting on Listing Applications

On a quarterly basis, CNSX Markets will submit to the Commission a report containing the following information:

(a) The number of listing applications filed;

(b) The number of listing applications that were accepted;

(c) The number of listing applications that were rejected and the reasons for rejection, by category;

(d) The number of listing applications that were withdrawn or abandoned and, if known, the reasons why the application was withdrawn or abandoned, by category;

(e) The number of listing applications filed by CNSX Issuers as a result of a Fundamental Change;

(f) The number of listing applications filed by CNSX Issuers as a result of a Fundamental Change that were accepted;

(g) The number of listing applications filed by CNSX Issuers as a result of a Fundamental Change that were rejected and the reasons for rejection, by category;

(h) The number of listing applications filed by CNSX Issuers as a result of a Fundamental Change that were withdrawn or abandoned and, if known, the reasons why the application was withdrawn or abandoned, by category.

In each of the foregoing cases, the numbers shall be broken down by industry category and in any other manner that a Director of the Commission requests.

3. Notification of Suspensions and Disqualifications

If a CNSX Issuer has been suspended or disqualified from qualification for listing, CNSX Markets will immediately issue a notice setting out the reasons for the suspension and file this information with the Commission.

4. General

CNSX Markets will continue to comply with the reporting obligations under the Automation Review Program.

 

Appendix B

Rule Review Process

1. CNSX Markets will file with the Commission each new or amended rule, policy and other similar instrument (Rule) adopted by its Board.

2. More specifically, CNSX Markets will file the following information:

(a) the Rule;

(b) a notice of publication including:

(i) a description of the Rule and its impact;

(ii) a concise statement, together with supporting analysis, of the nature, purpose and intended effect of the Rule;

(iii) the possible effects of the Rule on marketplace participants, competition and the costs of compliance;

(iv) a description of the rule-making process, including a description of the context in which the Rule was developed, the process followed, the issues considered, the consultation process undertaken, the alternative approaches considered and the reasons for rejecting the alternatives;

(v) where the Rule requires technological changes to be made by CNSX Markets, CNSX Dealers or CNSX Issuers, CNSX Markets will provide a description of the implications of the Rule and, where possible, an implementation plan, including a description of how the Rule will be implemented and the timing of the implementation;

(vi) a reference to other jurisdictions including an indication as to whether another regulator in Canada, the United States or another jurisdiction has a comparable rule or has made or is contemplating making a comparable rule and, if applicable, a comparison of the Rule to the rule of the other jurisdiction;

(vii) whether the Rule is classified as "public interest" or "housekeeping"; and

(viii) where the Rule is classified as "housekeeping", the effective date of the Rule.

3. For the purposes of the Rule Review Process, a Rule may be classified as "housekeeping" if it does not affect the meaning, intent or substance of an existing rule and involves only:

(a) the correction of spelling, punctuation, typographical or grammatical mistakes or inaccurate cross-referencing;

(b) stylistic formatting, including changes to headings or paragraph numbers;

(c) amendments required to ensure consistency with an existing approved rule; or

(d) changes in routine procedures and administrative practices of CNSX Markets provided that such changes do not impose any significant burden or any barrier to competition that is not appropriate.

Any rule falling outside of this definition would be categorized as a "public interest" Rule. Prior to proposing a Rule that is of a "public interest" nature, as defined above, the Board of CNSX Markets shall have determined that the entry into force of such "public interest" Rule would be in the best interests of the capital markets in Ontario. The material filed with the Commission in relation to "public interest" Rules shall be accompanied by a statement to that effect.

4. Where a Rule has been classified as "public interest", the Commission will publish for a 30 day comment period in its bulletin or on its website the notice filed by CNSX Markets and the Rule. If amendments to the Rule are necessary as a result of comments received, Commission staff shall have discretion to determine whether the Rule should be re-published for comment. If the Rule is re-published, the request for comment shall include CNSX Markets' summary of comments and responses thereto together with an explanation of the revisions to the Rule and the supporting rationale for the amendments.

5. A "public interest" Rule will be effective as of the date of Commission approval or on a date determined by CNSX Markets, whichever is later. A "housekeeping" Rule shall be deemed to have been approved upon being filed with the Commission, unless staff of the Commission communicate to CNSX Markets, within five business days of receipt of the Rule, their disagreement with CNSX Markets' classification of the Rule as "housekeeping" and the reasons for their disagreement. Where staff of the Commission disagree with CNSX Markets' classification, CNSX Markets shall re-file the Rule as a "public interest" Rule. A "housekeeping" Rule shall be effective on the date indicated by CNSX Markets in the filing.

6. The Commission shall publish a Notice of Commission Approval of both "public interest" and "housekeeping" Rules in its bulletin or on its website. All such notices relating to "public interest" Rules shall also include CNSX Markets' summary of comments and responses thereto. All such notices relating to "housekeeping" Rules shall be accompanied by the notice filed by CNSX Markets and the Rule itself.

7. If CNSX Markets is of the view that there is an urgent need to implement a Rule, CNSX Markets may make a Rule effective immediately upon approval by CNSX Markets' Board provided that CNSX Markets:

(a) provides the Commission with written notice of the urgent need to implement the Rule prior to the submission of the Rule to CNSX Markets' Board; and

(b) includes in the notice referenced in 2(b) an analysis in support of the need for immediate implementation of the Rule.

8. If the Commission does not agree that immediate implementation is necessary, Commission staff will advise CNSX Markets that the Commission disagrees and provide the reasons for its disagreement. If no notice is received by CNSX Markets within 5 business days of the Commission receiving CNSX Markets' notification, CNSX Markets shall assume that the Commission agrees with its assessment.

9. A Rule that is implemented immediately shall be published, reviewed and approved in accordance with the procedure set out above. Where the Commission subsequently disapproves a Rule that was implemented immediately, CNSX Markets shall repeal the Rule and publish a notice informing its marketplace participants.

10. The terms, conditions and procedures set out in this section may be varied or waived by Commission staff. A waiver or variation may be specific or general and may be made for a time or for all time. The waiver or variation must be in writing by Commission staff.

 

Appendix C

Eligible Issuers

1. Subject to section 2 below, only an issuer that:

(a) is a reporting issuer or the equivalent in a jurisdiction in Canada; or

(b) is proposing to list debt securities issued or guaranteed by a government in Canada that are exempt from the prospectus requirements under clause 73(1)(a) of the Act; or

(c) is proposing to list debt securities issued or guaranteed by a financial institution that are exempt from the prospectus requirements under clause 73(1)(b) of the Act; and

(d) is not in default of any requirements of securities legislation in any jurisdiction in Canada,

is eligible for listing. However, if an issuer is eligible for listing under paragraph (b) or (c) above, CNSX may only list debt securities of the issuer that are contemplated by those paragraphs unless the issuer files and obtains a receipt for a preliminary prospectus and a prospectus in a jurisdiction in Canada.

2. An issuer that is a reporting issuer in a jurisdiction in Canada but is not considered eligible under the Rules due to the process by which it became a reporting issuer, is ineligible for listing unless it:

(a) files and obtains a receipt for a preliminary prospectus and a prospectus in a jurisdiction in Canada; and

(b) is not in default of any requirements of securities legislation in any jurisdiction in Canada.