NIN 92/22 - Fiscal Agency Agreements Request for Comment [NIN - Rescinded]
| Published Date: | 1992-07-17 |
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| Effective Date: | 1992-07-16 |
In the past two years, approximately 80 issuers listed on the Vancouver Stock Exchange (the "Exchange") have entered into fiscal agency agreements, most of them with Exchange member firms. Under the typical agreement, the agent undertakes to provide certain fiscal services in exchange for compensation, generally in the form of securities issued under an order exempting the distribution from the registration and prospectus requirements of the Securities Act.
A number of issues have arisen with respect to fiscal agency agreements as a result of the experience of market participants and regulators with these agreements. In order that all of these issues can be addressed in a uniform and effective fashion, the British Columbia Securities Commission is soliciting comment on certain questions relating to fiscal agency agreements, the answers to which will form the basis for the development of consistent Commission and Exchange policies in this area. ISSUES ON WHICH THE COMMISSION IS SEEKING COMMENT
This request for comment sets out certain key issues of concern to the Commission and the Exchange that have arisen over the past two years. Market participants and their advisers are requested to provide comments on these issues and any other related issues that they consider relevant.
The Purpose of Fiscal Agency Agreements
In recent years, the regulators have encouraged member firms to maintain a continuing interest and involvement in the affairs of issuers on whose behalf they have completed distributions. In addition, market conditions have caused member firms to seek additional sources of revenue. Fiscal agency agreements have developed in response to these two factors.
From a regulatory perspective, the involvement of member firms in the ongoing monitoring of issuers assists the Commission and the Exchange, both of whose regulatory resources are limited. As well, member firms have an interest in ensuring that issuers on the Exchange carry out their activities properly.
Many member firms have argued that this increased monitoring creates additional expense for them. Fiscal agency agreements have been viewed as one way of compensating them for that increased expense. These agreements have also been seen as an additional source of revenue in times when other sources of revenue have been scarce.
Some issuers have argued that few, if any, additional services are provided under fiscal agency agreements. They suggest that these agreements merely provide a basis for the imposition of additional fees for services that were previously provided in connection with individual transactions, for which member firms receive commissions and broker's warrants.
Do fiscal agency agreements serve a necessary or useful purpose in the Vancouver market?
The Relationship between Member Firms and Issuers
Many issuers have expressed the concern that the relationship between member firms and issuers is fundamentally unequal and that member firms have the upper hand in the negotiation process. Some have gone further and suggested that issuers are "coerced" by member firms to enter into fiscal agency agreements.
Is the bargaining relationship between issuers and member firms sufficiently balanced so that fiscal agency agreements can be negotiated in an equitable manner, free of inappropriate pressures?
Who Can Act as a Fiscal Agent
To date, the Commission has not generally been prepared to issue orders in respect of fiscal agency agreements involving persons who are not registrants in British Columbia. This reflects the relatively cautious approach by the Commission to this recent development. However, interest in fiscal agency agreements has been expressed by U.S. registrants, B.C. registrants who are not members of either the Investment Dealers Association (the "IDA") or the Exchange and persons who are registered in neither Canada nor the United States.
Should fiscal agency agreements be permitted only where the agent is an IDA or Exchange member? If compensation is by way of cash as opposed to securities, does this affect the response?
The standard fiscal agency agreement provides that the agent will provide some or all of the following services:
- locating additional financing;
- providing market and business plan consultation;
- providing advice regarding the review of potential joint ventures, acquisitions, projects, mergers, take overs or other corporate reorganizations;
- introducing the issuer to institutional investors, public and investor relations firms, business consultants and other potential strategic partners; and
- assessing the impact on the market for the issuer's shares of proposed market acquisitions, investments or reorganizations.
The Commission has noted that these services are substantially the same as those provided under many investor relations agreements.
In the Vancouver market, do the services provided under investor relations agreements differ in substance from those provided under fiscal agency agreements? If not, should issuers be permitted to enter into investor relations agreements only with those persons with whom they can enter into fiscal agency agreements? CompensationMany of the concerns identified by the Commission with respect to fiscal agency agreements have involved the terms of compensation. As a rule, agreements involving cash consideration do not require orders. Therefore, the Commission generally sees only those fiscal agency agreements providing for consideration in the form of securities.
There are difficulties associated with the issuance of shares as compensation as a result of the requirements of the Company Act. Specifically, section 43 of the Company Act provides that shares cannot be issued until they are fully paid. If the consideration for the shares is services, those services must be services that were actually performed for the issuer. The value of those services must be established by a resolution of the directors and must not exceed fair market value.
Many of the agreements submitted to the Commission in respect of applications for orders have involved the issuance of a pre-determined block of shares in equal monthly tranches over the term of the agreement. Such agreements fly squarely in the face of the Company Act provisions and the Commission has required these agreements to be amended before issuing the requested orders.
What compensation models should be used in fiscal agency agreements involving the issuance of shares to ensure that the shares are issued in compliance with the Company Act?
Recently, the Commission has seen a number of fiscal agency agreements providing for compensation in the form of warrants. Warrants are attractive to issuers because the issuers receive some cash at the time the shares are issued. Generally, the warrants are issued at no cost at the time the agreement is entered into and are exercisable at the market price at that time.
Should warrants issued pursuant to a fiscal agency agreement be exercisable immediately or in tranches as services are provided over the term of the agreement? Where a fiscal agency agreement provides for compensation in the form of warrants, the consideration paid for the services provided under the agreement is determined by the difference between the exercise price and the market price of the shares at the time of exercise.
Does this form of compensation, which is solely dependent on an increase in the price of the issuer's shares, create an inappropriate incentive or detract from the perceived fairness of the market?
The current practice of the Exchange is to limit the compensation provided under a fiscal agency agreement to 2% of the issuer's issued capital, in the case of shares, and 4% of the issuer's issued capital, in the case of warrants.
Should these limits on compensation be maintained, changed or removed?
Prior to the development of fiscal agency agreements, many of the services covered by these agreements were provided by registrants, with compensation in the form of commissions on particular transactions. The Commission understands that the current practice is to continue to require commissions on specific transactions in addition to the compensation under the fiscal agency agreement.
Does this practice result in a double payment for services? Conflict of Interest Issues
A fiscal agency agreement creates a conflict of interest for a registrant between its duties to its clients and its obligations to the issuer under the agreement. Specifically, where a fiscal agency agreement is in place between an issuer and a registrant, the issuer is a "connected party' of the registrant as that term is defined in Part 13.1 of the Securities Regulation. Part 13.1 sets out certain disclosure and procedural requirements for a registrant in respect of a distribution of securities by a connected party of the registrant.
Should similar requirements be imposed on registrants with respect to secondary trading in securities of an issuer with whom the registrant has a fiscal agency agreement? Part 13.1 also sets out disclosure requirements for a registrant making recommendations with respect to securities of an issuer to whom the registrant has provided financial advice for consideration during the past year.
Are there additional circumstances in which the registrant should be required to make this disclosure? Special Relationship Issues
Where a fiscal agency agreement is in place between an issuer and a registrant, the registrant is in a "special relationship" with the issuer as that term is defined in the Act. In the course of discharging its duties under the agreement, the registrant is likely to come into possession of undisclosed material information. This relationship and this information must be managed in such a way as to avoid breaches of the insider trading and tipping prohibitions in the Act. It has been the Commission's experience that fiscal agency agreements are generally negotiated by a salesperson and that the services to be provided are performed by a salesperson. This means that the undisclosed material information revealed in connection with an agreement will generally be in the hands of a salesperson, thus exacerbating the concern about possible insider trading and tipping. The Commission invites comments on whether
- it is appropriate that salespeople be involved in negotiating and providing services under fiscal agency agreements, given the risks associated with the receipt of undisclosed material information,
- the ability to enter into fiscal agency agreements should be restricted to registrants that have corporate finance departments with established rules for protection of undisclosed material information, that is, so-called "Chinese walls", and - a registrant should be restricted in its ability to trade the shares of issuers with whom the registrant has a fiscal agency agreement.
REQUEST FOR COMMENT
The Commission is requesting written comments on fiscal agency agreements, particularly on the issues raised in this notice. Comment letters should be submitted by September 30, 1992 to
Adrienne Wanstall
Executive Director, Policy & Legislation
British Columbia Securities Commission
1100-865 Hornby Street
Vancouver, B.C. V6Z 2H4
Comment letters submitted in response to Requests for Comment are placed in a public file and form part of the public record, unless confidentiality is requested. Although comment letters requesting confidentiality will not be placed in the public file, freedom of information legislation in future may require the Commission to make comment letters available. Persons submitting comment letters should therefore be aware that the press and members of the public may be able to obtain access to any comment letter.
DATED at Vancouver, British Columbia, on July 16, 1992.
Superintendent of Brokers