PrefBlog

The Ontario Securities Commission has announced:

The Canadian Securities Administrators (CSA) today published for comment CSA Staff Notice 61-303 and Request for Comment Soliciting Dealer Arrangements. The notice outlines regulatory issues raised by soliciting dealer arrangements and seeks input on the practice, which generally involves an issuer paying a dealer to successfully solicit securities from a securityholder in connection with corporate transactions.

The actual notice asks:

3. Are soliciting dealer arrangement fees typically only paid in respect of votes “for” management’s recommendations? Is that appropriate in all circumstances? Is there a reason to distinguish proxy contests in this regard?
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5. Do you think that the potential conflict of interest on the part of an investment dealer or a dealing representative can be effectively managed?

a. If so, what steps should an investment dealer take to appropriately manage or avoid the conflict of interest? What steps should a dealing representative take, beyond disclosure, to appropriately manage or avoid the conflict of interest?

b. Does the answer differ depending on whether the transaction is

i. a take-over bid tender,

ii. a securityholder vote in relation to a merger or acquisition transaction,

iii. a securityholder vote to amend the terms of a security, or

iv. a securityholder vote in the context of a proxy contest?

c. In the context of a securityholder vote in relation to a merger and acquisition transaction, does the answer to #5 differ depending on whether the fee is contingent on the securityholder voting in favour of the transaction and/or the transaction being approved?

d. In the context of a proxy contest, does the answer to #5 differ if the fee is contingent on the securityholder voting in favour of management’s nominees and/or management’s nominees being elected?

e. What type of communication and disclosure by investment dealers and dealing representatives should be made to the securityholder respecting the existence of a soliciting dealer arrangement?

6. Do you think that there are circumstances in which it would never be appropriate for an investment dealer to enter into a soliciting dealer arrangement? If so, please discuss what such circumstances would be.

7. Are soliciting dealer fees paid to investment dealers and/or dealing representatives in connection with securities held in managed accounts? If so, in what circumstances?

8. How can investment dealers and dealing representatives participating in a soliciting dealer arrangement in respect of a proxy contest ensure compliance with the proxy solicitation rules?

9. Are investment dealers and/or dealing representatives involved in proxy contests where a proxy solicitation firm has been retained?

10. Do you believe that an investment dealer or a dealing representative has a responsibility to encourage its client to respond to proxy solicitations, rights offerings, take-over bids or other corporate transactions such as conversion of convertible securities?

Steven M. Harris, Jennifer F. Longhurst and Gilles R. Comeau of DAVIES WARD PHILLIPS & VINEBERG LLP have issued a bulletin titled CSA Reviewing and Seeking Comments on Soliciting Dealer Arrangements in Proxy Contests and Corporate Transactions in which they provide a little background. Naturally, the emphasis is on proxy contests, in which the legal fees are higher than in ‘change of terms’ solicitations.

My own views on sleaze fees has been made public for some time, most recently with respect to the aborted TransAlta preferred share exchange in early 2017. In a nutshell: it is grossly improper for a portfolio manager to accept payola for voting in a certain way but I see nothing wrong with a salesman collecting his little envelope for voting in a certain way (let’s just make sure that their business card says “salesman”, OK? and that there is no corporate overlap whatsoever between companies that employ salesmen paid by issuers and transaction charges and those which employ portfolio managers paid solely by clients). However, as has been discussed on PrefBlog far too often, there is a vast constituency of ha-ha “investor advocates” ho-ho who believe that paying salesmen commission is an affront to capitalism and should be banned. So there might be some who disagree with me regarding the propriety of salesmen getting their palms greased – it’s self-evident that if trailers are improper then so are solicitation fees.

Anyway … now it’s time for PrefLetter!

PerpetualDiscounts now yield 5.42%, equivalent to 7.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.9%, so the pre-tax interest-equivalent spread is now about 315bp, a slight (and perhaps spurious) narrowing from the 320bp reported April 4.

Well, so much for the pretense of independent and objective advice!

Toronto-Dominion Bank has taken unusual steps to discourage some clients from investing in the marijuana sector.

The bank is limiting the ways in which its advisers discuss the industry with clients, banning staff from recommending almost all marijuana firms and exchange-traded funds (ETFs), according to a recent internal e-mail viewed by The Globe and Mail. TD is also prohibiting portfolio managers from proactively adding most cannabis shares to certain client investment accounts – unless clients specifically instruct their adviser to do so.

As a result, the bank’s investment advisory channel – TD Wealth Private Investment Advice (PIA) – has put dozens of pot stocks and the four Canadian-listed cannabis ETFs onto its non-approved list of securities, leaving advisers with only three Canadian marijuana stocks to suggest.
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Investors who use the bank’s online discount brokerage – TD Direct Investing – can buy and sell pot stocks without issue, as those trades are self-directed.

The restrictions put on advisers who work at PIA appear to be driven out of concern of the legal risks the bank could face in the United States, where cannabis is legal in some states but illegal under federal law.

“This is an evolving issue with legal ramifications in the U.S. Therefore, we are restricting our advisers from counselling clients to acquire shares in certain cannabis-organizations with operations in the U.S.,” TD spokeswoman Emily Vear said in an e-mail.
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In the internal e-mail sent to TD advisers at the end of March, TD warned that cannabis companies “with U.S. touchpoints could create significant legal risks to [TD Wealth Private Investment Advice] due to the application of U.S. federal laws.” Last week, it wouldn’t explain what those risks are.

I’m sure that if I started tailoring my advice to reduce my company’s legal risk in a foreign country, I’d be getting an uncomfortable visit from the OSC! But don’t worry, regulation fans! I’m sure TD will be OK.

Jobs, jobs, jobs!

The Canadian economy added more jobs than expected last month, driven by hiring in construction and a recovery in full-time positions, data showed on Friday, though economists still expect the central bank to take its time raising interest rates again.

Canada created 32,300 jobs in March, Statistics Canada said, topping economists’ forecasts for an increase of 20,000. The unemployment rate held at 5.8 per cent, while the participation rate was unchanged at 65.5 per cent.

Average hourly wages were up 3.1 per cent from a year ago, matching February’s annual growth rate. Wages are a key measure being watched by the Bank of Canada, with policymakers still seeing slack in the labor market.

But the US was a bit softer than expected:

■ 103,000 jobs were added last month. Wall Street economists had expected an increase of about 185,000, according to Bloomberg.

■ The unemployment rate was 4.1 percent for the sixth straight month.

■ Average earnings rose by 8 cents an hour and are up 2.7 percent over the past year.

■ The Labor Department revised its estimate of February’s job growth upward, but January’s figure was revised sharply downward. The net result was a loss of 50,000 jobs relative to prior estimates.

Meanwhile there are soothing babblings about NAFTA:

Nafta talks have entered a new, intensive phase of discussions and will continue in the coming days, Canada’s foreign minister said after meeting with her U.S. and Mexican counterparts in Washington.

Chrystia Freeland, speaking to reporters Friday afternoon, said the tone of talks is positive and that the three countries are making progress. Canadian Prime Minister Justin Trudeau, speaking elsewhere the same day, said he hoped to get “positive news in the coming times” as talks continue.

And some less soothing babblings:

The Republican president’s renewed ramblings on trade dominated U.S. equity markets this week, with a tweet-induced swoon on Friday leaving the S&P 500 Index 1.4 percent lower than where it started on Monday. The gauge swung wildly, notching four moves of at least 1 percent in the five days, and the Cboe Volatility Index spiked above 20, nearly double its level for the past year.
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Trump’s impact on the market was on full display over the past five days. The week began with a 2.2 percent tumble after Trump battered Amazon.com Inc. on Twitter, exacerbating a selloff in megacap tech shares. It didn’t help that China put out a list of products it would target with retaliatory tariffs after the White House issued its own the night before.

A three-day rally of more than 3 percent followed, as White House officials insisted the trade bluster was a negotiating tactic. But Trump upended that notion late Thursday, ordering a review of even harsher tariffs that sparked a bookend rout.

The Bank of Canada has released a working paper by Michael Brolley, David A. Cimon titled Order Flow Segmentation, Liquidity and Price Discovery: The Role of Latency Delays:

Latency delays—known as “speed bumps”—are an intentional slowing of order flow by exchanges. Supporters contend that delays protect market makers from high-frequency arbitrage, while opponents warn that delays promote “quote fading” by market makers. We construct a model of informed trading in a fragmented market, where one market operates a conventional order book and the other imposes a latency delay on market orders. We show that informed investors migrate to the conventional exchange, widening the quoted spread, while the quoted spread narrows at the delayed exchange. The overall market quality impact depends on the relative concentration of speculators who may become informed. If speculators are few relative to liquidity traders, total welfare falls; with relatively more speculators, total welfare rises.
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Latency delays are one of the latest means by which exchanges differentiate themselves. These delays are introduced to segment uninformed order flow from the broader market, by preventing informed traders acting on fleeting information. We find that latency delays have a mixed impact on market liquidity: the imposition of a delay improves liquidity on the delayed exchange, but worsens liquidity on standard exchanges. Moreover, the presence of a delayed exchange reduces overall information acquisition, but the subsequent impact on price discovery depends on the ratio of speculators to liquidity traders: with a greater presence of speculators, a delayed exchange worsens overall price discovery, whereas markets with fewer speculators see price discovery improvements when one market imposes a delay.

Our model makes several empirical predictions. We predict that, following the introduction of a delay, quoted spreads should improve at the delayed exchange, while worsening at the standard exchanges. We also predict that the presence of a delayed exchange improves liquidity investor participation, and that informed trading should cluster on the non-delayed exchange. Finally, we predict that as adverse selection increases, total exchange volume falls, while delayed exchange volume increases.

Of interest to policy makers, the impact of delays on price discovery and welfare depend on the relative concentration of speculators. The presence of a delay either decreases welfare when there are few speculators, or increases welfare when there are many. Results for price discovery are reversed: price discovery falls when there are many speculators, but may increase if there are few. Depending on whether a regulator prioritizes welfare or price discovery, the regulator may wish to allow delays for some assets, while disallowing for others.

Equities have tanked after some Trumpian sabre rattling on trade:

President Donald Trump ordered his administration to consider imposing tariffs on an additional $100 billion in Chinese imports, a salvo that sent U.S. stock futures tumbling on concern the world’s two largest economies were hurtling toward a full-blown trade war.

The move threatens to unravel efforts by top U.S. and Chinese trade officials to lower the heat and reach an agreement that could stave off an escalating conflict.

U.S. stock futures dropped on Trump’s latest trade directive. S&P 500 Index futures slid as much as 1.6 percent, after the underlying gauge ended up 0.7 percent on Thursday.

So we’ll see what tomorrow brings!

PerpetualDiscounts now yield 5.45%, equivalent to 7.08% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little under 3.90%, so the pre-tax interest equivalent spread is now about 320bp, a slight (and perhaps spurious) narrowing from the 325bp reported March 28.

The second quarter opened on a sour note:

The deepening rout in once high-flying technology shares sent U.S. stocks tumbling to start the second quarter, as fresh presidential criticism of Amazon.com and retaliatory tariffs from China rattled markets. Gold rose on haven demand.
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Selling was heaviest in technology stocks. The Nasdaq 100 Index lost 2.9 percent as investors continued to offload some of the bull market’s biggest gainers. Amazon, up 50 percent in the past year, sank after Donald Trump renewed his attack on the online retailer. Netflix slid 5 percent, while chipmakers in the S&P 500 plunged 4.3 percent thanks to Intel’s worst day in two years. Bonds erased declines and gold spiked higher as the equity selling picked up steam.
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The S&P 500 Index declined 2.2 percent as of 4 p.m. New York time.
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The yield on 10-year Treasuries was little changed at 2.74 percent. The yield on two-year Treasuries fell two basis points to 2.25 percent.

Trump’s complaints about the “Amazon Washington Post” and his effects on the market look a lot like a precursor to crony capitalism:

Donald Trump has long bragged how his presidency has been a boon to the stock market. His recent attacks on Amazon.com Inc. are undermining that position.
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The online retailer was the biggest drag on the equity benchmark Monday, a position its held for a week as it plunged 12 percent since Axios reported that the president was “obsessed” with regulating the company. That wiped about $75 billion from Amazon’s market capitalization.
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Trump has unleashed a barrage of tweets accusing Amazon of not paying enough in taxes and underpaying the U.S. Postal Service.

As far as Amazon’s postal costs are concerned, I found this exposition illuminating:

The Postal Service is losing money, but its package delivery service is profitable, unlike its letter delivery.

The Postal Service is required by law to cover its costs for delivering competitive products, such as packages for Amazon. The Postal Regulatory Commission, which oversees the service, set the appropriate share of the costs of package delivery at 5.5% a little more than a decade ago.

Since then, the service’s delivery of packages has grown substantially, and the United Parcel Service argued in a submission to the commission in 2015 that a realistic appropriate share of costs for those deliveries should be about 24.6%.

A Citigroup analysis last year found that that difference would amount to about $1.46 per parcel, which might serve as the basis for Trump’s $1.50 figure. An op-ed penned in July by Josh Sandbulte in the Wall Street Journal cited that analysis in arguing the Postal Service’s estimate of costs for delivering packages should be revised. Sandbulte is co-president of Greenhaven Associates, a money management firm that owns FedEx common stock.

In response, US Postal Service executive Joseph Corbett wrote that the op-ed provided an “inaccurate and unfair account,” and that the Postal Regulatory Commission has determined each year that the service is covering its costs for package deliveries.

Corbett asserted the Postal Service’s financial insolvency is the result of its inability to overcome “systemic financial imbalances caused by legal and other constraints,” such as a price cap on revenue-producing products that doesn’t take changes in delivery volumes and costs into account.

The Postal Service’s biggest money problem is that it has billions in retirement obligations to its workers that it can’t afford.

But this could play out in Canada’s favour:

The Trump administration is pushing for a preliminary Nafta deal to announce at a summit in Peru next week, and will host cabinet ministers in Washington to try to achieve a breakthrough, according to three people familiar with the talks.

The White House wants leaders from Canada and Mexico to join in unveiling the broad outlines of an updated pact at the Summit of the Americas that begins April 13, while technical talks to hammer out the finer details and legal text could continue, according to the people. They asked not to be identified because the talks are private.
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The three nations face a challenge to meet the U.S.’s goal because major divisions remain, including on the U.S. proposal for more North American content in automobiles. The White House declined to comment on plans to announce a deal for the North American Free Trade Agreement.

America’s eagerness to strike a deal on its biggest trade pact comes as U.S. stocks tumbled, falling in seven of their last 10 trading sessions on concerns Trump’s protectionism could spark a trade war. The White House in the past month has imposed tariffs on steel and aluminum imports, and announced plans to slap duties on Chinese goods over alleged intellectual-property violations.