SECURITIES REGULATION AND IR

A Taskforce established by the Ontario Government earlier this year to review the Ontario Securities Act and provide policy recommendations on how to reduce regulatory burden in the Province released in July its interim report for public comment.

The interim report sets out 47 recommended changes in many ‘high impact’ areas. These recommendations are often cast in quite general terms. The Taskforce expresses support for the Cooperative Capital Markets Regulatory (CCMR) system.

The following recommendations in the interim report are significant because they propose to redefine the purpose of securities law in Ontario and represent a significant departure from current rules in a variety of areas, including: public offerings; private placements; digital access; proxy contests and procedures; Ontario Securities Commission (OSC) Staff investigative and enforcement practices; and the role and governance of self-regulatory organizations (SROs) such as the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). Below are highlights:

• Recommendation 1. Significantly alter the mandate of the OSC to include fostering capital formation and competition in the markets. This represents a major difference from the current mandate of the OSC (fostering fair and efficient capital markets, protecting investors and reducing systemic risk).
• Recommendation 2. Separate the regulatory and adjudicative functions of the OSC through a separate tribunal. OSC governance would be changed such that the Board of Directors (led by the Chair) would focus on strategic oversight and governance of the regulator, and the CEO (a separate position from Chair) would focus on day-to-day management. A Chief Adjudicator would oversee adjudicative responsibilities of the tribunal and OSC Staff policy work would be independent from the adjudicative tribunal.
• Recommendation 4. Move to a single, more independent SRO that regulates all advisory firms, including investment dealers, mutual fund dealers, portfolio managers, exempt market dealers and scholarship plan dealers. The new SRO would carry out statutory registration functions on behalf of the OSC for all of these firms, including registration of firms and individuals. The OSC would apparently exit the direct registration function but step up oversight of the SRO, including in respect of policy decisions and recruitment of executives. 
• Recommendation 7. Introduce an alternative offering model prospectus exemption for reporting issuers. This proposed exemption would allow reporting issuers listed on an exchange to offer freely tradable securities based on their existing continuous disclosure record and a short offering document without the need to file a prospectus, subject to certain conditions.
• Recommendation 16. Enact a prohibition on registrants benefiting from tying or bundling of capital markets and commercial lending services.
• Recommendation 17. Enhance access to bank-owned distribution channels for independent products.

Other Taskforce recommendations that will be of interest to particular stakeholder groups include the following:

• Recommendation 14. Expand the accredited investor definition to include individuals who have completed relevant proficiency requirements, such as the Canadian Securities Course Exam, the Exempt Market Products Exam, the CFA Charter, or who have passed the Series 7 Exam and the New Entrants Course Exam.
• Recommendation 18. Introduce a retail investment fund structure to pursue investment objectives and strategies that involve investments in illiquid early stage businesses.
• Recommendation 19. Require TSX-listed companies to set targets and provide data in respect of the representation of women, black people, indigenous people, and people of colour (BIPOC) on Boards and in executive officer positions. TSX-listed companies would no longer be allowed to set their own diversity targets and would instead have to meet prescribed targets. The Taskforce proposal is a target of 40% women and 20% BIPOC. A 10-year maximum tenure limit for directors of TSX-listed companies would also be introduced, with an allowance that 10% of the Board can exceed the 10-year maximum for up to two years.
• Recommendation 20. Introduce a regulatory framework for proxy advisory firms (PAFs) to provide issuers with a right to ‘rebut’ PAF reports, and restrict PAFs from providing consulting services to issuers in respect of which the PAF also provides clients with voting recommendations.
• Recommendation 21. Decrease the ownership threshold for early warning reporting disclosure from 10% to 5%.
• Recommendation 22. Adopt quarterly filing requirements for institutional investors of Canadian companies.
• Recommendation 31. Create an Ontario Regulatory Sandbox between the OSC and the recently established Financial Services Regulatory Authority of Ontario (FSRA) in order to benefit entrepreneurs and start-ups. In the longer term, consider developing a Canadian Super Sandbox.
• Recommendation 32. Introduce a requirement for market participants to provide open data. This is intended to encourage more data sharing arrangements and to facilitate more Fintech solutions for businesses and investors.
• Recommendation 39. Create rights for persons or companies directly affected by an OSC investigation or examination to apply to an OSC adjudicator for ‘clarifications’ relating to investigations, examinations and summonses.
• Recommendation 41. Broaden the confidentiality exceptions available for disclosing an investigation and examination order or a summons.
• Recommendation 42. The OSC would be required to be ‘reasonable and proportionate’ in how it imposes its information requests or investigation orders on market participants.
• Recommendation 44. Implement OSC procedural requirement to provide an invitation to discuss the OSC Staff’s proposed statement of allegations at least three weeks before initiating proceedings.

The Taskforce will publish a final report setting out its recommendations for regulatory reform to the Minister of Finance by the end of the year. The timetable for implementing final recommendations might be affected by interprovincial discussions about which recommendations must be implemented in other provinces.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with co-author Cristian Blidariu, Partner, McCarthy Tétrault LLP in Vancouver.