Notice and Request for Comment - Reorganization and Initial Public Offering - TSX Inc. (formerly The Toronto Stock Exchange Inc.)
A. BACKGROUND
TSX Inc. (formerly The Toronto Stock Exchange Inc.) has applied to the Commission for an amended recognition order granting the continued recognition of TSX Inc. as a stock exchange and the recognition of TSX Group Inc. (TSX Group) as a stock exchange to reflect a reorganization prior to the initial public offering (IPO) of TSX Group, a new holding company for TSX Inc., and the name change of The Toronto Stock Exchange Inc. to TSX Inc. In addition, the Canadian Venture Exchange Inc. (CDNX) has applied to amend its exemption from recognition order to reflect the reorganization of TSX Inc and the name change of CDNX to TSX Venture Exchange Inc.
The Commission is publishing for comment the application of TSX Inc. and related documents. We are seeking comments on all aspects of TSX Inc.'s application and related documents. We also request specific comment on certain matters identified below and have highlighted certain other important aspects of TSX Inc.'s application.
B. NAME CHANGES
Effective July 10, 2002, The Toronto Stock Exchange Inc. changed its name to TSX Inc. The shareholders approved the TSX Inc. name change at the The Toronto Stock Exchange Inc. annual and special shareholders' meeting held on July 9, 2002. It is intended that CDNX will change its name to TSX Venture Exchange Inc. shortly.
C. TSX INC.
1. Reorganization
It is proposed that a reorganization of TSX Inc. will take place whereby a newly created company, TSX Group, will become the sole shareholder of TSX Inc. TSX Inc. will continue to own all of the shares of TSX Venture Exchange Inc. Immediately after the completion of the reorganization, TSX Inc. will be wholly-owned by TSX Group, and TSX Venture Exchange Inc. will be wholly-owned by TSX Inc.
2. Share Ownership Restrictions
In connection with the IPO, TSX Inc. is proposing that there be a change to the permitted limit on ownership of TSX Group shares from the existing ownership limits applied to TSX Inc. shares. Currently, under section 21.11 of the Securities Act (the Act), share ownership of TSX Inc. is limited to 5 per cent of outstanding shares unless the prior consent of the Commission is obtained. TSX Inc. proposes that the restriction be increased from 5 per cent to 10 per cent. To effect this change, it is proposed that the Commission make a regulation as contemplated under subsection 21.11(5) of the Act. A copy of the draft regulation is attached to the application of TSX Inc.
3. Listing of TSX Group Shares
In connection with the IPO, it is contemplated that TSX Group will list its shares on the Toronto Stock Exchange. To address issues that may arise due to the listing of TSX Group on the Toronto Stock Exchange, TSX Inc. will establish a reporting structure whereby it notifies the Commission of conflicts of interest or potential conflicts of interest that arise or may arise. The Commission will have the opportunity to monitor TSX Inc. in this respect and may make decisions with respect to conflicts issues where it sees fit. Listing-related conditions are set out in an appendix to TSX Inc.'s recognition order.
TSX Inc. proposes that the conflicts committee be comprised of:
• the chief executive officer of TSX Inc.;
• the general counsel of TSX Inc.;
• the senior financial officer of TSX Inc.;
• the president or general counsel of Market Regulation Services Inc. (RS Inc.);
• a second senior management representative of RS Inc.;
• the senior officer responsible for listings of each of TSX Inc. and TSX Venture Exchange Inc.; and
• the senior officer responsible for trading operations of TSX Inc.
TSX Inc. submits that the conflicts committee, as proposed, has the highest degree of independence of any conflicts committee of any publicly-traded stock exchange, to the best of their knowledge. Staff request comment on the composition of the conflicts committee.
Question 1: Please comment on the proposed composition of the conflicts committee.
4. Recognition Order
The Toronto Stock Exchange Inc.'s original recognition order dated April 3, 2000 was obtained in the context of the demutualization of the Toronto Stock Exchange and was amended and restated on January 29, 2002 to reflect that it was retaining RS Inc. to perform its market regulation functions. Changes have been made to the recognition order to reflect the reorganization and IPO. One key change is the recognition of TSX Group, the newly incorporated holding company of TSX Inc. The amended recognition order is now divided into Part I, terms and conditions relating to TSX Group, and Part II, terms and conditions relating to TSX Inc.
Set out below is a summary of changes to the recognition order applicable to TSX Group and TSX Inc.
(a) Recognition of TSX Group - Part I of Schedule "A" to the amended recognition order
TSX Group will be recognized as a stock exchange, in addition to TSX Inc., and certain terms and conditions in the recognition order will apply directly to TSX Group. One of the terms and conditions, set out in paragraph 5 of Part I, is that TSX Group will carry out its activities as a stock exchange recognized under section 21 of the Act and that it will do everything within its control to cause TSX Inc. to carry out is activities as a stock exchange recognized under section 21 of the Act and to comply with the terms and conditions applicable to TSX Inc. set out in Part II of the recognition order.
Other terms and conditions applicable to TSX Group include corporate governance, fitness of officers and directors, sufficient allocation of resources to TSX Inc., access to information by the Commission and provisions to reflect that the share ownership restrictions in section 21.11 of the Act apply to TSX Group.
(b) Recognition of TSX Inc. - Part II of Schedule "A" to the amended recognition order
Some changes, discussed below, have been made to the terms and conditions applicable to TSX Inc. In addition, terms and conditions relating to the listing of TSX Group and its competitors on TSX Inc. will be set out in a new Appendix I to the recognition order.
(i) Corporate Governance
The definition of independent director has been expanded to include shareholders over 10%.
(ii) Fitness
A new paragraph has been added regarding the fitness of officers and directors.
(iii) Financial Viability
The financial ratios have been revised in order to make them more meaningful measurements of financial viability. In addition, a new provision has been added prohibiting TSX Inc. from entering into transactions either outside the ordinary course of business or with related parties where, after giving effect to the transaction, it would not comply with the financial tests.
(iv) Regulation
RS Inc. will be required to monitor TSX Group as an additional listed issuer. The supervisory function of RS Inc. will not change with the addition of TSX Group as a listed issuer; however, RS Inc. will be required to follow procedures set out in Appendix I to TSX Group and TSX Inc.'s recognition order. This will be set out in the regulation services agreement. RS Inc. will also be required to co-operate with the Commission in setting up alert parameters specific to TSX Group.
(v) Sanction Rules
The provision regarding disciplinary actions has been expanded to include sanctions for issuer-related violations. Similarly, a new provision was added to require that TSX will have appropriate procedures to monitor and enforce issuer compliance with TSX's rules.
(vi) Self-listing conditions
This new paragraph has been added to the recognition order which requires that TSX Inc. shall be subject to the terms and conditions relating to the listing of TSX Group on TSX Inc. as set out in Appendix I.
(vii) Outsourcing
A paragraph relating to material outsourcing of business functions by TSX Inc. has been added. TSX Inc. is required to proceed in accordance with industry best practices and ensure that the Commission be permitted to have access and inspect information necessary to perform oversight of TSX Inc.
(viii) Related Party Transactions
A new provision regarding related party transactions has been added. The term and condition requires any material agreement or transaction entered into between TSX Inc. and TSX Group or any subsidiary or associate to be on terms and conditions that are at least as favourable to TSX Inc. as market terms.
D. TSX VENTURE EXCHANGE INC.
CDNX has also applied for an order amending and restating the Commission's amended exemption order of the Canadian Venture Exchange dated July 31, 2001. First, it is intended that the Canadian Venture Exchange Inc. will change its name to TSX Venture Exchange Inc. In addition, the Alberta Securities Commission and the British Columbia Securities Commission will be granting new recognition orders for TSX Venture Exchange. As the ASC and BCSC recognition orders are attached as appendices, it is necessary to grant a revised amended exemption from recognition order. Other than the revised ASC and BCSC orders, there are no other changes to the exemption from recognition order.
E. COMMENT PROCESS
You are asked to provide your comments in writing and delivered on or before August 23, 2002 addressed to the attention of the Secretary of the Commission, Ontario Securities Commission, 20 Queen Street West, Toronto, Ontario, M5H 3S8.
We request that you submit a diskette containing an electronic copy of your submission. The confidentiality of submissions cannot be maintained as a summary of written comments received during the comment period will be published.
Following the comment period, staff will consider the comments received. Subject to comments received, staff will recommend that an amended recognition order be granted to TSX Group and TSX Inc. and an amended and restated exemption from recognition order be granted to TSX Venture Exchange Inc. generally in the same form set out in the materials.
Questions may be referred to:
Cindy Petlock
Manager, Market Regulation
(416) 593-2351
email: [email protected]
Susan Greenglass
Senior Legal Counsel, Market Regulation
(416) 593-8140
email: [email protected]
July 26, 2002.s