FALSE BIDS/SHORTERS,IS IIROC PROTECTING YOU!!!! Short selling is a rather narrow topic, but one that creates strong and often diametrically opposed opinions. We undertook a lengthy study of the regulation of short selling in Canada (the “Short Sale Analysis”), including the regulations governing short sales in the Universal Market Integrity Rules (“UMIR”) of the Investment Industry Regulatory Organization of Canada (“IIROC”). This bulletin summarizes our concerns and conclusions with respect to the Canadian short selling regulatory regime.1
McMillan will hold a conference on the Canadian short selling landscape on November 19, 2019. More information and registration for CPD and CLE credit eligibility can be found here.
The benefits and importance of short selling in providing liquidity and facilitating price discovery are undeniable. Short selling is critical to the vibrancy and efficiency of Canada’s relatively small capital markets. As a result, Canadian securities regulators and IIROC have historically taken a hands-off approach to short sales, ostensibly to preserve these benefits. This has happened even as securities regulators in other jurisdictions (such as in the United States under Regulation SHO) have enhanced their regulation of short sales, particularly following the financial crisis in 2008.
Based on our research, it is clear that IIROC’s largely non-interventionist approach and its focus on maintaining liquidity have made Canadian companies attractive targets for short campaigns. From 2015 to 2018 there was an increase in the number of short campaigns in Canada, while generally in other jurisdictions there was a decrease. Additionally, the number of short campaigns in Canada is utterly disproportionate to the size of our capital markets when compared to the United States, the European Union and Australia (as examples). The reason for this seems clear: short selling regulations in Canada are out of step with regulations in those other jurisdictions - see Schedule A attached hereto. As a result of inherent weaknesses in the Canadian short sale regulatory regime, short sellers may well be attracted to the Canadian capital market....