Save Canadian Mining (SCM) is lead charge to give voice to specific interests of Canada’s junior mining sector

By Heather Duhn

Investors who support Canada’s junior mining sector are patiently waiting for the Ontario Ministry of Finance to decide whether predatory stock manipulation will once again become illegal.

Save Canadian Mining (SCM) is leading the charge to give a voice to specific interests of Canada’s junior mining sector, and requesting that government have greater oversight in Canada’s capital market structure, protect the industry, and create positive change with government and regulatory agencies.

The push to revise the laws surrounding predatory stock manipulation began over a year ago.

With the primary goal of requesting regulatory changes to Ontario’s capital markets, the volunteer-led advocacy group was launched in 2019 by CEO of Chilean Metals Inc. Terry Lynch. The organization has since received support from the TSX Venture Exchange, the Ontario Mining Association, the Ontario Prospectors Association, and industry leaders like Sprott Mining Inc., Osisko Mining Inc., First Majestic Silver Corp., and McEwen Mining Inc., in addition to over 3,000 supporters through its online campaign.

The group is working to remove a trading rule, known as the tick test and stop short-sale transactions of daily volumes of products that are short sold in the market and applied across all 14 Canadian trading venues. The 142 year-old rule restricted short selling to neutral or sales to positive price changes at the time of sale, and was removed in 2012 by a Liberal government.

Since its removal by the Investment Industry Regulatory Organization of Canada (IIROC) and CSA, Canadian markets have evolved to a place "where short selling activities, high frequency trading, and algorithms are exploiting the lack of a tick test to the detriment of Canada’s junior markets."

The organization has been urging the Ministry of Finance to implement these changes to the Securities Act as soon as possible and support the formation for junior issuers. “It is critical for the mining sector that these structural changes happen. Junior miners have been victims of regulatory loopholes and algorithmic and high-frequency traders for too long,” says Lynch.

Since SCM launched, the Ontario government has publicly acknowledged that a review of the Securities Act was overdue, launched a review of the Securities Act, appointed a taskforce to consult with stakeholders, and has pledged to remove barriers to growth for small businesses trading on public exchanges.

Since 2019, a committee comprised of staff from the CSA began undertaking research and analysis on activist short selling. One of the most notable additions to the final report was the recommendation to address the settlement of short sales. On December 3, 2020 the Ontario Securities Commission (OSC) issued a consultation paper, regarding activist short selling, which arose from an increased number of campaigns targeting Canadian issuers, and the potential impact on Canadian capital markets. The paper was also in response to stakeholder concerns regarding potential regulatory intervention-inhibiting short selling activity and soliciting feedback (supported by evidence whenever possible) from stakeholders on specific questions, and ensure the CSA has all relevant information before determining if regulatory intervention is required.

The paper outlines how “short sales made without prior arrangements to borrow, or reasonable expectation to borrow the security first are considered ‘naked short sales’ and not permitted under securities legislation  for short sales by market makers that provide liquidity in the stock (See Rules Notice -- Notice of Approval -- Provisions Respecting Regulation of Short Sales and Failed Trades, IIROC Notice 12-0078 (2 March 2012) [IIROC Notice 12-0078]). Naked short sales can lead to failed trades when the seller is not able to deliver the shares within the two-day settlement period.”

While short sellers represent only one of many borrowers in the securities lending market. The lender are typically large buy-side firms, which also include pension funds, insurance firms and mutual fund/ETF providers, etc, since securities lending is a scale business offering loan holdings of securities of mostly large and frequently traded issuers.

"When a short-seller seriously attacks the integrity of a company's senior executives or Board members, the temptation to sue for defamation is almost impossible to overcome. Some believe that they almost have to sue for defamation, for fear that their failure to do so will be viewed as an admission of the short-seller's claims. Canadian CEOs and companies have accordingly sued in the past over critical reports. But the business wisdom of pursuing such a claim is not universally supported, and the efficacy of such defamation claims is disputed..." Bell, Derek and Ellins, Katelyn, "Get Shorty: Defamation and Regulatory Claims in Canada" (DLA Piper Canada), July 26, 2017.

CSA staff have completed a review of social media used by Reporting Issuers and noticed 51-356 problematic promotional activities by issuers. According to Lin, Tom C.W., The New Market Manipulation (July 3, 2017), published in the Emory Law Journal, Vol.66, p.1253: Temple University Legal Studies Research Paper No. 2017-20, available at SSRH, “Social media’s implications on financial markets extends beyond the activist short selling and is therefore outside the scope of the paper.”

A crowdsourced research platform who claims to be "the world's largest investing community" (with approximately 17 million users per month; over 16,000 contributors; and a dedicated section to short selling for called "Short Ideas" for paid subscribers” requires all contributors to disclose positions in stocks they write about and to obtain editor approval before posting information…

As previously noted in IIROC Notice 12-0078 -- Provisions Respecting Regulation of Short Sales and Failed Trades, supra note 19, there is no universally accepted definition of ‘naked short selling.’ The most common usage is in connection with a short sale when the seller has intentionally chosen not to make arrangements to borrow any securities that may be required to settle the resulting trade. Some commentators use a more restrictive interpretation that describes any short sale when the seller has not pre-borrowed the securities necessary for settlement…Depending on circumstances, statutory civil liability for misrepresentations general only attaches to statements made by issuers, their directors, certain officers and other ‘influential persons.’ See e.g., Part XXIII and Part XXIII.1 of Securities Act (Ontario) and Division II of Chapter II of Title VIII of Securities Act (Québec).”

According to Re Carnes, 2015 BCSECCOM 187; Cohodes, supra note 96, “it should also be noted that this issue is not unique to Canada. There are very few enforcement cases against activist short sellers in other jurisdictions as well.” In the US, only the short selling volume for individual securities is published daily and individual short sale transactional information is published on a one-month delay but does not contain short seller details.”

Canada's markets, unlike the US, allow for "naked short selling" a practice that allows for the short-selling of tradable assets prior to borrowing the security. In 2008, the Securities and Exchange Commission (SEC) in the US banned what it termed "abusive naked short selling,"  however, this trend remains legal in Canada. 

The minister of finance has yet to announce publicly when they will decide on this issue.

To join the campaign and view SCM’s submission to the CSA go to www.savecanadianmining.com.

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