INTHE MATTER OF
THESECURITIES ACT, R.S.O. 1990,
CHAPTERS.5, AS AMENDED (the "Act")
INTHE MATTER OF
MARKETREGULATION SERVICES INC.
Market Regulation Services Inc. ("RS Inc.") has applied forrecognition as a self-regulatory organization;
RSInc. will be a regulation services provider under National Instrument21-101 Marketplace Operation Rule and National Instrument23-101 Trading Rules (together the ATS Rules);
RSInc. has agreed to provide regulation services to The TorontoStock Exchange Inc. and the Canadian Venture Exchange, Inc.under the ATS Rules, as agent for each of them. In this capacity,RS Inc. will administer the exchanges' market conduct and tradingrequirements and monitor and enforce compliance with these requirementsby the exchanges' members, their directors, officers, employees,affiliates and representatives;
RSInc. also intends to act as regulation services provider forquotation and trade reporting systems and alternative tradingsystems under the ATS Rules;
RSInc. has agreed to the terms and conditions set out in ScheduleA;
Basedon the application of RS Inc. and the representations and undertakingsRS Inc. has made to the Commission, the Commission is satisfiedthat the recognition of RS Inc. would not be prejudicial tothe public interest;
TheCommission recognizes RS Inc. as a self-regulatory organizationpursuant to section 21.1 of the Act subject to the terms andconditions set out in Schedule A.
"HowardI. Wetston" "Derek Brown"
1.CORPORATE GOVERNANCE(a)To ensure diversity of representation, RS Inc. will ensure that:
(i)its board is composed of individuals that provide a proper balancebetween the interests of the different entities desiring accessto its regulation services; and
(ii)a reasonable number and proportion of its directors are independentdirectors. (b)RS Inc.'s governance structure will provide for:
(i)fair and meaningful representation on its board and any committeesof its board; and
(ii)appropriate qualifications, remuneration, conflict of interestprovisions and limitation of liability and indemnification protectionsfor its directors and officers and employees generally.
(c)In addition, RS Inc. will ensure that:
(i)at least 50 percent of its directors, other than the Presidentof RS Inc., are independent directors, and an independent directoris a director that is not
(A)an associate nor a director, officer or employee of a marketplaceparticipant that is a dealer, a marketplace to which RS Inc. providesregulation services, a shareholder of RS Inc. or an affiliatedentity of any of them; or
(B)employed by RS Inc. or associated with it;
(ii)at all times, one of its directors is an individual who is associatedwith or has experience with the Canadian public venture capitalmarket;
(iii)at all times, at least one of its directors represents alternativetrading systems (ATSs);
(iv)its board delegates the selection of independent directors andof the director representating ATSs (whether that director isan independent director or not) to its Governance Committee, whichis composed of all the independent directors of RS Inc.;
(v)it provides the Commission with notice of all appointments toits board;
(vi) the Presidentof RS Inc. is deemed to be neither an independent nor a non-independentdirector;(vii)the quorum for its board is a simple majority of directors, withat least one representative from each shareholder and at least50% of the independent directors present;
(viii)it does not, without prior Commission approval, make changesto its corporate governance structure, articles, by-laws orany shareholders' agreement; and
(ix)it reviews its corporate governance model within 12 months ofrecognition and periodically after that to ensure that the modelappropriately reflects the evolution of the equity markets andpromptly reports to the Commission the results of its reviews.
(a)RS Inc. will have a fair, transparent and appropriate processfor setting fees. These fees will:
(i)be allocated on an equitable basis among marketplaces and marketplaceparticipants; and
(ii)balance the need for RS Inc. to satisfy its responsibilitieswithout creating barriers to access.
(b)RS Inc. will ensure that it:
(i)charges fees on a cost recovery basis;
(ii)does not, without prior Commission approval, make any significantchanges to its fee model; and
(iii)reviews its fee model within 12 months of recognition and periodicallyafter that to ensure that it continues to meet the requirementsof this section and promptly reports to the Commission on theresults of its reviews.
3.ACCESS TO SERVICES AND DUE PROCESS
(a)RS Inc.'s requirements will permit all marketplaces to accessits regulation services if they satisfy the criteria RS Inc.has established for this purpose.
(b)RS Inc. will:
(i)establish written criteria for granting access to its regulationservices;
(ii)not unreasonably prohibit or limit access to its regulationservices; and
(iii)keep records of:
(A)each grant of access to its regulation services and, for eachentity granted access the reasons for granting access; and
(B)each denial or limitation of access and the reasons for denyingor limiting access.
(c)In addition, RS Inc. will enter into a written agreement withany marketplace authorized to operate under the ATS Rules thatsatisfies RS Inc.'s criteria for access and requests accessto its regulation services; the agreement will provide that:
(i)RS Inc. will monitor the conduct of marketplace participantsand the activities of marketplaces;
(ii)RS Inc. will enforce the requirements governing the conductof marketplace participants;
(iii)the marketplace will transmit the audit trail information requiredunder Part 11 of National Instrument 21-101 Marketplace Operation;
(iv)the marketplace will comply with all orders or directions madeby RS Inc.; and
(v)if the marketplace is an ATS, the ATS will conduct its tradingactivities in compliance with the requirements set by RS Inc.
(d)In connection with giving access to its regulation services,RS Inc. will ensure that:
(i)its requirements, the limitations or conditions it imposes onaccess, and the decisions it makes to deny access are fair andreasonable;
(ii)the parties are given notice and an opportunity to be heardor make representations; and
(iii)it keeps a record, gives reasons and provides for appeals ofits decisions.
(a)RS Inc. will maintain sufficient financial resources for theproper performance of its regulation functions.
(b)RS Inc. will operate on a not-for-profit basis.
(c)RS Inc. will have a risk management policy that will allow itto identify issues that may prevent it from allocating sufficientfinancial and other resources to carry out its regulation functionsin a manner that is consistent with the public interest andthe terms and conditions of the order.
(d)Each month, RS Inc. will compare the revenues and expendituresincurred by RS Inc. with the revenues and expenditures forecastedfor that month in RS Inc.'s annual operating plan.
(e)If the actual numbers compared to the forecasted numbers resultin a deficit of 15% or more for a period of three months, RSInc. will report to the Commission and the President of RS Inc.will deliver a letter advising the Commission of the reasonsfor the deficit and the steps being taken to address any issuesarising from the deficit.
(f)If the actual numbers compared to the forecasted numbers resultin a deficit of 25% or more for a period of three months, RSInc. will report to the Commission and will not, without theprior approval of the Commission, make any capital expendituresor pay any bonuses to any directors and officers not alreadyreflected in the financial statements, or make any loans, dividendsor other distributions of assets to any related company or shareholderuntil the deficiencies have been eliminated for at least sixmonths.
(g)RS Inc. will provide the Commission with a copy of the annualoperating plan each year once it is approved by its Board.
5.CAPACITY TO PERFORM REGULATORY FUNCTIONS
(a)RS Inc. will maintain its ability to perform its regulationfunctions including setting requirements governing the conductof ATSs and their subscribers, monitoring the conduct of marketplaceparticipants and the activities of marketplaces, and enforcingthe requirements governing the conduct of marketplace participantsand ATSs.
(b)In particular, RS Inc. will:
(i)provide the Commission with an annual report in the form andwith the information specified by the Commission from time totime;
(ii)not, without prior Commission approval, make significant changesto the manner in which RS Inc. performs its regulation services,functions, and processes and to its organizational structure,including any significant changes to its staffing complementby function and location;
(iii)have the necessary financial, technological and other resourcesto efficiently and effectively provide its regulation services;
(iv)adopt policies and procedures designed to ensure that confidentialinformation about its operations or any marketplace or marketplaceparticipant is maintained in confidence and not shared inappropriatelywith other persons, and use reasonable efforts to comply withthese policies and procedures;
(v)promptly report to the Commission misconduct or apparent misconductby a marketplace, a marketplace participant or others if:
(A)RS Inc. reasonably expects investors, one or more marketplaces,marketplace participants or their customers, the Canadian InvestorProtection Fund, or RS Inc. to suffer serious damage as a consequence,or
(B)RS Inc. has reasonable grounds to believe that fraud may bepresent;
(vi)promptly report to the Commission any material deficienciesin RS Inc.'s supervision or internal controls;
(vii)notify the public and media of:
(A)each disciplinary or settlement hearing by promptly issuinga press release that includes the names of the parties and identifiesthe nature of the alleged violation, and posting on its websitea copy of the notice of hearing no later than the day in whichthe notice of hearing is issued, and
(B)the terms of each settlement and the disposition of each disciplinaryaction by promptly issuing a press release that includes thenames of the parties, the findings and the sanctions imposedand posting on its website a copy of the settlement agreementor decision;
(viii)ensure that disciplinary and settlement hearings are open tothe public and media except when required for the protectionof confidential matters and establish written criteria for makinga determination on confidentiality;
(ix)notify the Commission of all information required in AppendixC to the Memorandum of Understanding for the oversight of RSInc. among the regulators recognizing RS Inc., as amended fromtime to time (MOU);
(x)not complete any transaction that would result in RS Inc. ceasingto perform its regulation services, discontinuing, suspendingor winding-up all or a significant portion of its operations,or disposing of all or substantially all of its assets without:
(A)providing the Commission at least six months prior notice ofits intention, and
(B)complying with any terms and conditions the Commission may imposein the public interest for the orderly discontinuance of itsoperations; and
(xi)not assign, transfer, delegate or sub-contract the performanceof all or a substantial part of its regulation services or anyfunction set up to perform these services, to any party withoutthe prior approval of the Commission.
6.CAPACITY AND INTEGRITY OF SYSTEMS
(a)RS Inc. will:
(A)make reasonable current and future capacity estimates for itscritical systems;
(B)conduct capacity stress tests to determine the ability of itscritical systems to perform its regulation functions in an accurate,timely and efficient manner;
(C)develop and implement reasonable procedures to review and keepcurrent the development and testing methodology of those systems;
(D)review the vulnerability of those systems to internal and externalthreats including physical hazards and natural disasters; and
(E)establish reasonable contingency and business continuity plans;
(A)arrange for an independent review and report, in accordance withestablished audit procedures and standards, of its critical systemstechnology plans to ensure that it has appropriate processes inplace to manage the impact of change in technology on itself andparties interfacing with it (this will include an assessment ofRS Inc.'s controls for ensuring that each of its critical systemscomplies with paragraph (i) above), and
(B)ensure that senior management conducts a review of the reportcontaining the recommendations and conclusions of the independentreview; and
(iii)promptly notify the Commission of material systems failures andchanges.
7.PURPOSE OF RULES
(a)RS Inc. will establish rules, policies, or other similar instruments("Rules") that are:
(i)not contrary to the public interest; and
(ii)necessary or appropriate to govern and regulate all aspects ofits business and affairs.
(b)More specifically, RS Inc. will ensure that:
(i)the Rules are designed to:
(A)ensure compliance with securities legislation;
(B)prevent fraudulent and manipulative acts and practices;
(C)promote just and equitable principles of trade;
(D)foster cooperation and coordination with entities engaged in regulating,clearing, settling, processing information about, and facilitatingtransactions in, securities; and
(E)provide for appropriate discipline;
(ii)the Rules do not:
(A)permit unreasonable discrimination between those granted accessto the regulation services of RS Inc.; or
(B)impose any burden on competition that is not necessary or appropriatein furtherance of securities legislation; and
(iii)the Rules ensure that its business is conducted in an orderlymanner so as to afford protection to investors.
8.RULES AND RULE-MAKING
(a)RS Inc. will file with the Commission all Rules and amendmentsto the Rules adopted by its board.
(b)RS Inc. will comply with the joint rule review protocol establishedby the Commission and other regulators recognizing RS Inc., asamended from time to time (Protocol).
(c)RS Inc. will administer and enforce the Rules applicable to marketplacesfor which RS Inc. acts as the regulation services provider aswell as any other rules of a marketplace as agreed to betweenRS Inc. and that marketplace.
(a)RS Inc. will file annual audited financial statements with theCommission prepared under Canadian GAAP and accompanied by thereport of an independent auditor within 90 days after the endof each financial year.
(b)RS Inc. will file quarterly financial statements with the Commissionprepared under Canadian GAAP within 60 days after the end of eachfinancial quarter.
(a)RS Inc. will appropriately discipline any person or company subjectto its regulation for violations of securities legislation, theRules, and any other rules of a marketplace as agreed to betweenRS Inc. and that marketplace.
(b)RS Inc. will have general disciplinary and enforcement provisionsin its Rules; these provisions will apply to any person or companysubject to its regulation.
(a)RS Inc. will share information and will otherwise co-operate withthe Commission and its staff, other Canadian securities regulatoryauthorities, Canadian exchanges, other regulation services providers,and other recognized self-regulatory organizations.
12.ADDITIONAL INFORMATION & COMPLIANCE WITH OVERSIGHT
(a)RS Inc. will provide the Commission any additional informationthe Commission may require from time to time.
(b)In particular, RS Inc. will file the information required in AppendixB of the MOU within the time periods set out below:
(i)If RS Inc. makes a changes to information contained on the coverpage and in Exhibits A, B, D (other than as a result of any issuance,transfer or cancellation of shares to permit ATSs to become shareholdersof RS Inc. under the provisions the unanimous shareholders' agreementamong RS Inc. the Toronto Stock Exchange Inc. and the InvestmentDealers Association of Canada), F, I and K of Appendix B, it willfile an amendment at least 45 days before making the change; and
(ii)If RS Inc. makes a change to any other information that is requiredby Appendix B except for a change to Exhibit J, it will file anamendment within 30 days after the end of the calendar quarterin which the change takes place.
Oncerecognized, RS Inc. must file a new Rule or a change to a Ruleunder the Protocol and financial statements within the time periodsprescribed in these terms and conditions.