NIN 95/54 - Transitional Market-Making Relief for Control Persons [NIN - Rescinded]

Published Date:	1995-12-15
Effective Date:	1995-12-14

The Securities Regulation, B.C. Reg. 270/86, (the "Old Regulation") contains an exemption in section 117(e) for certain sales by control persons of exchange issuers. It allows control persons to engage in limited trading through the Vancouver Stock Exchange without prior notice to the market and without complying with certain other resale restictions that would otherwise apply. The exemption was intended to permit control persons to provide some additional liquidity in the market for securities that are, in many cases, not widely held. The exemption in section 117(e) will be eliminated effective January 1, 1996, when the Old Regulation is replaced by the Securities Rules, B.C. Reg. 479/95. In the Commissions view, section 117(e) has resulted in significant compliance problems and does not deal effectively with the fundamental conflicts and regulatory problems that arise when control persons try to perform a market-making function.

During the past year, the Commission has indicated that it is prepared to consider replacing section 117(e) with an alternative exemption to permit market-making by control persons. The Commission not yet been able to craft an alternative exemption that resolves, in a comprehensive way, the conflicts and regulatory concerns that arise in these circumstances. Although the Commission has heard considerable support for the continuation of such an exemption, it has not yet received submissions that provide the evidence or compelling arguments to demonstrate the exemption is necessary or, ultimately, workable.

The Commission will provide a further opportunity over the next six months for market participants to make submissions on this issue before determining whether a market-making exemption should be provided for control persons and, if so, what form it should take. In the interim, the Commission will provide a limited exemption by blanket order.

Concurrently with the issuance of this Notice, the Commission is issuing BOR#95/7 (the "BOR"), under which a control person is exempt from the prospectus requirements of the Securities Act, S.B.C. 1985 c.83 (the "Act") for certain trades, provided the control person establishes and the issuer publicly discloses a discretionary market-making account (the "market-making account") in accordance with VSE Rules specified in the BOR. Trading in the account is subject to VSE Rules, Listings Policy 8 and NIN#95/5, entitled "Principles of Fair Trading". The BOR also provides relief from the insider reporting requirements and the accelerated insider reporting requirements for control persons, provided the registrant operating the marketing-making account reports the trading in that market-making account on a weekly basis. The BOR will expire on June 30, 1996.

Sections 68 and 119 of the Act prohibit trading by those with knowledge of undisclosed material facts or changes and provide civil liability for such trading. These provisions apply to all trading by persons in a special relationship with an issuer, including most control persons. The activity in a control persons market-making account is therefore subject to those provisions. BOR#95/7 requires the market-making account to be discretionary in order that the control person may be able to invoke the defences to violations of sections 68 and 119 of the Act found in section 161 of the Rules. However, the availability of these defences in any particular case will depend on the facts of each particular situation and will be reviewed on a case-by-case basis.

As was the case with section 117(e) of the Old Regulation, control persons engaging in market-making activity are still subject to the take over bid requirements of the Act and Rules. Any purchase of securities by a person, or by a member of a group of persons acting jointly or in concert, holding 20% of the issued and outstanding securities of that class is a take over bid and must comply with the requirements of Part 11 of the Act and the Rules. One possible exemption from the formal take over bid requirements is found in section 80(1)(b) of the Act, which permits purchases of a limited amount of securities at market prices. As the take over bid exemption in section 80(1)(b) of the Act refers to a limit of 5% of the issuers issued and outstanding securities over a 12 month period, while the prospectus exemption in the BOR refers to a limit of 5% of issued and outstanding securities in each calendar quarter, a control person who is relying on these exemptions must ensure that the registrant operating the market-making account carefully monitors trading in the account to ensure that neither of these limits is exceeded.

Request for Comments

Direct written comments by March 30, 1996 to:

Brenda J. Benham
Director
Policy and 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 the public file and form part of the public record, unless confidentiality is requested. Although comment letters requesting confidentiality will not be placed on the public file, freedom of information legislation 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 December 14, 1995.

Douglas M. Hyndman
Chair