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Securities regulators are asking whether Canada needs more rules for “activist” short-sellers, even as they note Canadian companies are far less often targeted by them than companies in the United States.

The data is part of a consultation paper published Thursday by the Canadian Securities Administrators, the umbrella group of provincial regulators. The CSA is seeking comment on activist short-selling, noting Canadian companies and their advocates have been raising concerns about their impact on the markets.

The CSA also cited the large number of 2018 campaigns among the reasons for creating the consultation paper. The group noted a 2019 Ontario Superior Court of Justice decision that said “There is a perception that the regulation of shorting ... selling is permissive and lax in Canada compared to other capital markets.”

Short-sellers borrow stock, sell it and hope to profit by buying it back at a lower price before repaying the loan. Activist shareholders do it noisily, publicly making their case the stock is overvalued and sometimes alleging nefarious behavior. Companies targeted by activists often call the practice “short and distort.”

Canada saw a number of short campaigns in the early years of the emerging cannabis sector, but other companies, such as Canadian Tire Ltd., Manulife Financial Corp. and Dollarama Inc., have also found themselves in the short-sellers’ sights.

While there was a large jump in activist short-selling in 2018, the CSA report says activist campaigns fell by two-thirds in 2019 suggesting the activity is “highly cyclical.” The CSA says between January, 2010, and September, 2020, a total of 73 Canadian companies have been the target of 116 campaigns - no more than five Canadian targets for every 1,000 Canadian-listed stocks. In comparison, the CSA says, there have been an average of 21 U.S. activist short-seller targets annually for every 1,000 U.S.-listed issuers. That rate is four times as high.

The 2018 total of 17 Canadian targets included six cannabis companies - suggesting, the CSA says, short-sellers focused on “specific, potentially overheated, sectors.”

The CSA says that in most of its jurisdictions, there is no mechanism under securities law that explicitly regulates the activities of activist short-sellers or their public statements. However, it says the conduct and statements of an activist short-seller could “fall offside of securities legislation” if they make materially misleading or untrue statements to the market. Still, the CSA says to make such a finding, the threshold of evidence is high. And civil lawsuits have not been widely used by companies to seek redress, either.

The CSA is asking for feedback on its consultation paper by March 3.

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