On September 18, 2008 the US Securities and Exchange Commission (SEC) issued an order pursuant to the Securities and Exchange Act of 1934 (the SEC Order) that “all persons are prohibited from short selling any publicly traded securities” of certain financial sector firms. This order was updated on September 22, 2008 to provide that US stock exchanges and markets are authorized to specify which firms would be the subject of the prohibition, and that the firms themselves could request that short selling of their securities re-commence.

On September 19, 2008 the Ontario Securities Commission (OSC) issued a Temporary Order (the OSC Order) under Section 127 (5) of the Securities Act (Ontario) prohibiting short selling of securities of certain financial sector firms listed on the Toronto Stock Exchange (TSX) and also interlisted in the United States.

The firms affected are: Aberdeen Asia-Pacific Income Investment Company Ltd., Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Fairfax Financial Holdings Limited, Kingsway Financial Services Inc., Manulife Financial Corporation, Quest Capital Corp., Royal Bank of Canada, Sun Life Financial Inc., Thomas Weisel Partners Group Inc., The Toronto-Dominion Bank, and Merrill Lynch & Co., Canada Ltd.

The OSC Order will remain in effect until October 3, 2008, unless extended by Order of the OSC.

It appears that the OSC Order was issued as a precautionary matter with respect to short selling of the securities of financial sector firms subject to the SEC Order, and that the OSC Order was only intended to prevent arbitrage in securities that are interlisted in the US (or in the case of Merrill Lynch & Co., Canada Ltd., whose shares are interchangeable into securities of Merrill Lynch & Co. Inc. which is listed in the US and subject to the SEC Order). The Canadian securities regulators do not appear to be inclined to extend the OSC Order to Canadian financial sector firms that are not interlisted, or to firms active in other sectors.

The OSC Order only addresses short selling in the securities of the named financial sector firms, and does not apply to short positions arising through exposure to derivatives.

On September 22, 2008, the Investment Industry Regulatory Organization of Canada (IIROC) published a Reminder Respecting Obligations in the Conduct of Short Sales (the IIROC Reminder) reiterating that “naked short selling” in Canada is prohibited. As stated in the IIROC Reminder, “under Rule 2.2 of the Universal Market Integrity Rules (UMIR), a Participant or Access Person will be considered to have engaged in manipulative and deceptive behaviour if the Participant or Access Person enters a sell order on a marketplace without having the reasonable expectation of settling any trade that would result from the execution of the order”.

The views of the OSC and IIROC regarding short selling may have been influenced by the Market Regulation Services Inc.’s Statistical Study on Failed Trades published in April 13, 2007 (the MRS Statistical Study on Failed Trades) which reviewed the activities of 25 Canadian investment dealers. The MRS Statistical Study on Failed Trades indicated that failed trades involving short sales were projected to account for only 0.07% of total short sales by study participants. We understand that this low rate of failed short sale trades is in contrast to the US experience and may be responsible for triggering a more severe response from the SEC on the matter of short selling.

The OSC Order is available on the OSC website at: http://www.osc.gov.on.ca/Media/NewsReleases/2008/nr_20080919_osc-issue-temporder.jsp

The IIROC Reminder is available on the IIROC website at: http://docs.iiroc.ca/DisplayDocument.aspx?DocumentID=4B1610D48A5442E79A197C8402C892C0&Language=en

MRS Statistical Study on Failed Trades is available on the IIROC website at: http://docs.iiroc.ca/DisplayDocument.aspx?DocumentID=743406BF02D54C7796C89D1507400B6F&Language=en