The Canadian Securities Administrators (CSA) released final amendments to its early warning rules. These rules are primarily intended to provide timely and actionable notification to investors of potential encumbrance on entitlements (most specifically, voting rights), and have some new provisions and exemptions for securities lending.
The key aspects of the final amendments related to securities lending are that exemptions to early warning reporting triggers are tied to the ability of the lender to either freely recall the securities loaned, or to issue binding voting instructions to the borrower. Essentially, this confirms and codifies common best practice, which is to avoid having securities on loan over voting entitlement periods. Importantly, though, this is no longer just good business and good customer service. Secondly, securities borrowers gain an exemption for reporting in connection with short sales that settle within 3 business days of the borrow; this accounts for the fact that the short seller is not in effective possession of the votable shares. Realistically this means that, in a T+3 environment, the borrow occurs no earlier than trade date.
Borrowers may also gain an exemption if they agree not to vote the shares (and, in fact do not vote the shares) if held over the voting rights period.
Apart from these exemptions, securities lending transactions are subject to the early warning reporting requirements.
The CSA rules reflect the long standing concern amongst investors and regulators that large scale changes in share holdings on or about a voting period can lead to manipulation of stock prices through disruptive voting by short term investors. Early Warning reporting seeks to ensure that long term investors retain their voting rights; that insurgent investors are not able to utilize short term strategies, such as securities borrows, to gain influence over corporate governance; that takeover bids cannot occur through non-transparent means utilizing technical loopholes/ inefficiencies; and that intermediaries assume substantial responsibility for protecting long term investor rights.
This will require that firms operating in Canada have rock solid processes to identify impending voting periods, and are able to both report out, and to take the allowable exemption actions required.
For further information, see CSA Notice of Amendments to Early Warning System from the Ontario Securities Commission.
