Month: November 2021
In this bulletin:
- Ontario’s New Draft Capital Markets Act – Topics of Interest to Registrants
- Déjà vu – Titles, Titles and More Titles – Proposed Amendments to Draft FSRA Guidance
In Brief: FSRA Consults on Consumer Advisory Panel ▪ Independent Evaluation of OBSI ▪ Canadian Companies Appointing More Women to Boards and Executive Roles ▪ CFA Institute Creates Voluntary ESG Disclosure Standards for Investment Products▪ Timeline for the New Self-Regulatory Framework ▪ OSC Releases Proposed Statement of Priorities
Important Reminders: Pre-Registration Activities and Titles – Watch those Names ▪ Check Your Titles Prior to Dec 31, 2021 ▪ Capital Markets Participation Fee – December 1 Filing Deadline ▪ Exempt Trade Reports for Funds Due in January – Don’t Delay; Prepare to File Today
BLG’s Resource Corner
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Winter is Here Edition | November 2021
In the previous issue of our bulletin, we provided a high level report on the new draft Capital Markets Act (Act) released by the Ontario Ministry of Finance (Finance) on October 12, 2021. In this issue, we highlight some of the provisions of the Act, together with the related Capital Markets Modernization Taskforce (Taskforce) recommendations, which we think will be of particular interest to our readers.
Additional Accredited Investor Categories
Citing the OSC’s 2020 report on exempt market activities in Ontario, the Taskforce noted in its final report that the accredited investor exemption was the most used prospectus exemption in Ontario in 2019, accounting for 95% of the gross proceeds invested by Ontario investors. Acknowledging its importance, the Taskforce recommended expanding the definition of accredited investors, in particular to include the individuals who have completed relevant proficiency requirements.
In response, Finance proposed giving the OSC rule-making authority to introduce additional categories under the accredited investor exemption, which would represent a departure from the current approach of setting out the relevant definition in the Securities Act. In addition, the Act would permit the Chief Regulator to designate a particular person to be an accredited investor if the Chief Regulator considers that it would be in the public interest to do so.
The approach contained in the Act would more closely align Ontario’s practices to those of the other CSA jurisdictions, and give the OSC additional flexibility to tailor the categories of accredited investors to ensure that they remain adapted to evolving capital markets.
Expansion of Civil Liability for Offering Memorandum Misrepresentations
Under the Securities Act, Ontario investors have civil liability recourse based on a right of action relating to misrepresentations in an offering memorandum. However, claims may only be brought against the issuer and a selling security holder (if any).
The Act would expand these rights by permitting an investor to bring an action for damages for misrepresentations in certain prescribed disclosure documents against i) the issuer, ii) the directors of the issuer, iii) promoters of the issuer, iv) influential persons, v) experts and vi) every person who signed the prescribed disclosure document, and an action for recission against the issuer. For certain other prescribed disclosure documents, rules having the same scope as those under the Securities Act would apply.
Although it is not yet exactly clear which documents would be included in the first category of prescribed disclosure documents and which documents would be included in the second category, Finance suggests that the first category would certainly include an offering memorandum.
While providing additional protection to the investing public, the increase in the size of the group of persons with respect to whom liability may be imposed significantly increase the stakes for everyone involved in the preparation of the relevant disclosure or offering documents because each of them could become responsible on a joint and several basis for the liability.
Additional Tools for Enforcing Compliance with Securities Legislation
Under the current regulatory regime, the OSC’s primary tool for bringing market participants into compliance is the enforcement procedures set out in the Ontario Securities Act. Although these procedures are designed to be more efficient and less burdensome than judicial proceedings, they may not always be efficient enough and do not allow the OSC to respond to securities law violations quickly.
The Act would permit the Chief Regulator of the OSC to issue compliance orders to quickly resolve specific situations. Such orders would include:
- Orders that relate to the dissemination of information to the public or to a fee required to be paid;
- Orders that any or all of the exemptions under capital markets law do not apply to the issuer or to a prescribed person; and
- Cease trade orders.
An opportunity to be heard would be afforded to specified persons for these orders. A number of additional changes to enforcement provisions have been proposed, including additional coverage for production orders and the ability to search a dwelling-house in the specified circumstances during the day (important to note while many people are still working from home).
Other Notable Measures
In addition to the above, the Act contains other measures aimed at ensuring that the capital markets rules stay current, flexible and responsive to developments such as:
- Imposing a requirement for five-year periodic reviews of the capital markets rules and the OSC rules;
- Giving the OSC designation powers and rulemaking authority to permit the OSC to provide regulatory clarity to businesses with unique offerings and appropriate protection to investors, such as in the area of crypto assets;
- Giving the OSC rule-making authority to allow for requirements to be placed on public issuers to have an annual advisory shareholders’ vote on executive compensation;
- Giving the OSC authority to prescribe requirements and restrictions for persons engaging in the promotion of purchases or trades of securities, and specifically prohibiting false and misleading statements (similar to prohibitions that currently exist in British Columbia);
- Increasing the maximum administrative monetary penalties to $5 million and the maximum fine for offences to $10 million;
- Explicitly prohibiting activities such as aiding, abetting or counselling a contravention of capital markets law and front-running;
- Establishing automatic and streamlined reciprocating provisions for orders from the other CSA jurisdictions, such as sanction orders, cease trade orders and settlements; and
- Establishing a procedure to have amounts disgorged from capital markets offenders and have them distributed to the investors who suffered financial losses.
Reduction in the Minimum Consultation Period for Rule-Making
Currently in Ontario, proposed OSC rules are required to go through a minimum public consultation period of 90 days. The Act would change the minimum consultation period to 60 days. Although this would bring Ontario’s practices in line with the other CSA jurisdictions, it would also require market participants and other impacted stakeholders to be vigilant in looking out for proposed new rules or changes to the existing rules that may affect them in the early stages in order to ensure that they do not miss the opportunity to provide input in the rulemaking process.
As the Act represents an overhaul of, rather than an incremental change to, the regulatory regime, it is expected that much attention will be required to be paid to transitional matters. Finance states that the primary goal is to minimize the impact of the transition to the Act on market participants and their businesses. It is Finance’s intention that no action need be taken by market participants. For example, existing registrations and activities would be continued under the new regime by operation of law.
In addition, because the Act introduces a new “platform” approach to the capital markets rules, Finance advises that market participants can expect that new rules as well as rule changes would be necessary to ensure that there will be no regulatory gaps and that the status quo is preserved where appropriate. In particular, Finance tells market participants to expect that:
- Prospectus and registration exemptions currently embedded in the Securities Act would be carried forward in rules;
- Carve-outs from the investment fund insider trading/self-dealing requirements would be found in the rules;
- The Commodity Futures Act would be repealed and replaced with a local rule that carries forward the existing registration regime except that the instruments will be treated as derivatives under the Act and registration will move to a derivatives registration regime; and
- The existing registration exemptions that derivatives dealers currently rely on would be carried forward in rules, subject to a separate OTC derivatives business conduct rule that would apply regardless of a dealers’ registration status.
We will continue to monitor the Act and its developments. In the meanwhile, if you have any questions about how the Act may affect your business or have any comments about the Act requiring our assistance for submission to Finance, please do not hesitate to contact any member of our team.
November 30, 2021
The Financial Services Regulatory Authority of Ontario (FSRA) has released additional proposed changes to its draft Financial Professionals Title Protection (FPTP) Application Guidance, which describes its approach to the administration of applications for credentialing bodies (CBs) and the financial planner (FP) and financial advisor (FA) credentials under its title protection framework. The application guidance is intended to help applicants through the CB approval process as well as the process for having an FP or FA credential approved. Changes are also being proposed to FSRA’s draft FPTP Supervision Guidance, which indicates how FSRA will deal with title users who do not hold a recognized credential or entities that improperly claim to be a credentialing body. The FPTP Supervision guidance also includes interpretation on other titles that could reasonably be confused with FP or FA titles, which as anticipated in our May 2021 bulletin, garnered a lot of comments during the previous consultations on the guidance.
Changes to the Application Guidance (from the May 2021 draft) include a new requirement for credential holders to disclose their credentials to consumers in a clear manner. In addition, any disciplinary action taken against credential holders that have been made public should outline the key facts and outcome of the case. In response to comments on the first drafts, CBs would now be expected to include a requirement for credential holders to put their client’s interest first. Also in response to comments, the Application Guidance now references the identification of appropriate asset allocation as a fundamental concept for both FP and FA credentials. Changes to the FPTP Supervision Guidance from the May 2021 draft include additional details on FSRA’s approach for CBs, including its expectations for receipt of annual information returns and the proposed CB examination process. The initial draft of the guidance had included a list of titles that would be out of scope of the proposed framework on the basis that they would not be confused with the FP/FA titles, and that list has now been removed. FSRA notes in response to comments that it intends to monitor the use of other titles for potential future amendments. FSRA’s enforcement powers would also be set out in more details in the revised guidance, including its ability to issue compliance orders to approved (and non-approved) CBs and to individuals who use an FP or FA title without an approved credential. The consultation comment period is open until December 13, 2021.
November 30, 2021
The Financial Services Regulatory Authority of Ontario’s (FSRA’s) Consumer Advisory Panel provides input to FSRA on its regulatory activities from a consumer perspective through FSRA’s Consumer Office. The Panel’s mandate includes providing input on FSRA’s statement of priorities, identifying topics for the consideration of the Consumer Office, and providing input on consumer research undertaken by FSRA or third parties. It has been in operation for a few years, and functions in accordance with its existing Terms of Reference. FSRA has released a consultation asking a number of questions with respect to the Terms of Reference in advance of the Panel’s third term in 2022, to determine if any changes are required. The Terms of Reference cover matters such as the Panel’s mandate, term limits (one year with a maximum three-year extension), and the Panel’s chair, which is currently the Chief Consumer Officer and/or their designate. Questions relate to these matters and more, including the per diem remuneration for attendance at meetings, Panel composition and meeting frequency. The comment due date is December 1, 2021 for anyone wishing to provide input.
November 30, 2021
Professor Poonam Puri has been appointed by the board of The Ombudsman for Banking Services and Investments (OBSI) to undertake an independent evaluation of OBSI’s operations. As the evaluation includes input from stakeholders, two requests for comment have been released seeking feedback on a number of different issues, with a comment deadline of January 31, 2022. One consultation focuses on OBSI’s role as one of two authorized External Complaints Bodies under the Bank Act (i.e. its banking-related mandate), and the other on its role as an independent dispute-resolution service for consumers with complaints against registered advisers and dealers in accordance with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
The questions relating to OBSI’s banking mandate are drawn from the requirements of the applicable regulations under the Bank Act, as well as the guidance set out for OBSI in CG-13 Application Guide for External Complaint Bodies published by the Financial Consumer Agency of Canada. These relate to, among other things, OBSI’s reputation, accessibility, governance, accountability to its members, complainants and the Commissioner of the FCAC, transparency and effectiveness. The questions relating to OBSI’s investment mandate are drawn from the requirements of a memorandum of understanding with certain members of the CSA. The request for comment asks questions on a number of areas relating to its investment mandate, including OBSI’s governance structure, independence, timeliness, its process for setting fees and allocating costs, resources, transparency through public consultations, processes for its core methodologies for dispute resolution and accessibility. Mention is also made of the recommendations of the Capital Markets Modernization Taskforce earlier this year to give the Ontario Securities Commission power to designate a dispute resolution service with binding decision powers and to increase the current monetary limits on compensation decisions.
The goal is for the evaluator to be able to report on OBSI’s operations applicable to the handling of banking complaints from member firms who are federally regulated financial institutions as well as its operations that apply to investment complaints involving firms whose relevant regulator is a CSA member, IIROC and/or the MFDA. Case studies of complaint files, key stakeholder interviews and a review of other evaluations and audits will also be taking place. Both consultations ask numerous questions of firms that have utilized OBSI’s services, and registrants may wish to provide input on those targeted inquiries.
November 30, 2021
On November 4, 2021, the Canadian Securities Administrators (CSA) published CSA Multilateral Staff Notice 58-313, its seventh annual review of disclosures relating to women in board and executive roles at reporting issuers (the Report).
The Report reviewed the disclosure of 599 non-venture issuers listed on the TSX with year-ends that fell between December 31, 2020 and March 31, 2021. According to the Report, women accounted for 22% of board seats in 2021, an 11% increase since 2015. 82% of issuers had at least one woman on their board, reflecting an increase of 33% over the past seven years. The Report revealed that 60% of issuers had adopted a policy relating to the representation of women on their boards, a significant increase since the existing framework was adopted in 2014. The Report concluded that reporting issuers with higher market capitalizations had a higher percentage of board seats held by women than those with a smaller market cap (i.e. less than $1 billion). Importantly, issuers who set targets had a greater proportion of board seats held by women.
With respect to executive officer positions, 67% of companies reviewed in the Report had at least one woman in an executive officer position, up from 60% in 2015. However, only 6% of issuers had targets for women in executive officer positions. Women were least likely to hold executive positions in the oil & gas, mining and technology sectors.
Consultations announced earlier this year by the CSA on broadening existing diversity initiatives and disclosure requirements, including one we have reported on in previous bulletins, are underway. We continue to watch developments and potential regulatory action in this area closely.
November 30, 2021
On November 1, 2021, CFA Institute issued its Global Environmental, Social and Governance (ESG) Disclosure Standards for Investment Products (Standards). The Standards are the first voluntary global standards designed to report on how an investment product considers ESG issues in its objectives, investment process and stewardship activities.
The Standards are intended to help investors, consultants, advisors and distributors better understand, compare and evaluate investment products. They are designed to accommodate the full range of investment vehicles, asset classes and ESG approaches offered in markets globally. The Standards were developed in part as a means to mitigate greenwashing and preserve the integrity of the information being shared about ESG investment products.
The Standards are premised on providing investors with information that is complete, reliable, consistent, clear, and accessible. CFA Institute outlined ten required, and one recommended, fundamentals of compliance. For example, investment managers must update ESG disclosures when changes are made to the requirements or interpretive guidance of the Standards, when the investment manager makes changes to information affecting the ESG disclosures, or when a significant error is found in ESG disclosures after being made available to investors. Finally, CFA Institute suggests defining terms such as “ESG integration”, “screening”, “thematic”, and “impact investments”.
CFA Institute will issue a handbook on or before May 1, 2022 explaining the provisions of the Standards as well as an optional template creating a standardized ESG disclosures format for ease of comparison. Before the end of 2022, CFA Institute will require investment managers preparing disclosures in accordance with the Standards to notify CFA Institute of their use.
November 30, 2021
On November 18, 2021 the Canadian Securities Administrators (CSA) issued a news release announcing progress on the creation of a new self-regulatory organization (SRO) for the investment industry and a new investor protection fund (IPF). The new SRO will consolidate the functions of the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). The new IPF will combine two existing investor protection funds, the Canadian Investor Protection Fund and the MFDA Investor Protection Corporation, into an integrated fund independent of the new SRO. Comment letters about the framework have been reviewed by the CSA and will be considered as the process moves forward. It is expected that the CEO and board of directors of the new SRO will be announced in the second quarter of 2022. Amalgamation of the existing entities, creating the new SRO, is expected to be completed by the end of 2022.
November 30, 2021
On November 18, the Ontario Securities Commission (OSC) published OSC Notice 11-794 Statement of Priorities seeking comment on its draft 2022-2023 Statement of Priorities (SoP) to inform its business planning for the fiscal year ending on March 31, 2023. The OSC has set out the following four strategic goals, and it has set out the priority initiatives it will pursue in support of those goals, for the fiscal year.
The first goal, promoting confidence in Ontario’s capital markets, will be supported by further work to sustain strong core regulatory operations, support implementation of the mutual fund embedded commission rules banning the use of deferred sales charges and trailing commissions where no suitability determination is required, improve the retail investor experience and protection (including the continued implementation of the OSC seniors’ strategy), and strengthen dispute resolution services for investors. In addition, the OSC’s work will include continued efforts to implement a new single enhanced self-regulatory organization and consolidate the current two investor protection funds independent from the new SRO, develop a rule setting out climate change-related disclosures for reporting issuers, strengthen oversight of crypto asset trading platforms and develop total cost reporting disclosure for mutual fund investors and segregated fund holders.
Reflecting the new OSC mandate to promote competition and foster capital formation, the second goal is to modernize the regulatory environment to capture priorities that continue to modernize regulatory oversight practices. This goal will be supported by implementing an enhanced framework and continuing work on streamlining periodic disclosure requirements for reporting issuers and work to modernize delivery options of regulatory and continuous disclosure filings for issuers.
Under the goal of facilitating financial innovation, the OSC will continue to evolve the regulatory environment in line with Ontario’s changing capital markets and investor needs. Through the Innovation Office, the OSC seeks to engage and support novel businesses, support and enable the use of technology and open data in our capital markets, foster new methods of engagement with the innovation community and expand the OSC TestLab.
The fourth goal, strengthening the organizational foundation of the OSC, involves investing in its people, technology and information systems. It continues to seek to redevelop CSA national systems (including working toward replacing the CSA national systems with SEDAR+), digital transformation and data and analytics enablement. In addition, the goal will be supported by fostering inclusion, equity and diversity as well as implementing a hybrid work pilot.
The OSC has removed reducing regulatory burden as a specific goal within this year’s SoP on the basis that it is embedding a culture of burden reduction across the organization and many of its activities have become integrated into its core operational work.
Written comments on the draft SoP are due by December 20, 2021. Any necessary adjustments to the SoP will be included prior to finalization and publication. If you have any questions or wish to comment on the draft SoP, please let us know.
November 30, 2021
We assist many businesses that are obtaining registration as an exempt market dealer, adviser and/or investment fund manager for the first time. Often, those seeking registration for their start-up businesses have engaged in other types of activities prior to submitting their registration application. It is very important to ensure that public documentation (e.g. websites, brochures, social media, ads) do not utilize any titles that could erroneously imply that the firm or its employees are already registered or conduct registrable activity. For example, innocent use of titles such as “portfolio manager” or “investment advisor” found on social media during the application process will be noted during the registration review, and result in many discussions and explanations (and potential delays) that could otherwise have been avoided. The Securities Act (Ontario) prohibits holding oneself out to be in the business of trading or advising in securities unless registered (or exempt from registration) in accordance with securities law. These issues are also addressed in OSC Staff Notices, including OSC Staff Notice 33-748, found here.
November 30, 2021
As previously mentioned in our bulletins, as part of the client-focused reforms to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, a new prohibition on misleading communications will apply as of the end of the year. In particular, a registered individual who interacts with clients must not use a corporate officer title, unless their firm has appointed that registered individual to that corporate office pursuant to applicable corporate law. Our clients have been approaching this new prohibition in a number of different ways, one of which is considering alternative titles (such as primary, manager or head of) for use by individuals who can not be appointed as corporate officers.
A friendly reminder that a number of housekeeping items should be addressed as part of this change:
- Updates to websites, internal policy documents and business cards; and
- Regulatory filings. Specifically, any title changes may require the filing of Form 33-109F5 Change of Registration Information to notify the applicable regulators of a change in information filed on your organizational chart (to the extent current titles are listed). Additionally, individuals with new titles may want to review Item 10 of their existing Form 33-109F4 to ensure their listed job title is accurate.
November 30, 2021
As we noted in last month’s bulletin, Form 13-502F4 – Capital Markets Participation Fee Calculation is due to be filed with the OSC by registrants no later than December 1, 2021. This requirement applies to firms in Ontario registered under the Securities Act, the Commodity Futures Act and unregistered capital markets participants, i.e. firms relying on the international exemptions from registration.
November 30, 2021
National Instrument 45-106 – Prospectus Exemptions (NI 45-106) exempts certain distributions of securities from the prospectus requirements. However, reliance on many of these exemptions requires issuers to report prospectus-exempt distributions to every securities regulator where a distribution of securities was made to a resident in that province. Generally, the deadline for issuers to file a completed Form 45-106F1 Report of Exempt Distribution (Form 45-106F1) is ten days after the date of distribution. However, issuers that are investment funds can opt to file their Form 45-106F1 once yearly by January 30 for distributions made in the preceding calendar year, provided the distributions were made in reliance on any of the following prospectus exemptions:
- Accredited investor;
- Minimum investment of $150,000; and
- Additional investment in investment fund units.
Form 45-106F1 must be filed electronically as follows:
- In British Columbia, through the online eServices portal of the BCSC;
- In Ontario, through the online Electronic Filing Portal of the OSC; and
- In all other jurisdictions, through SEDAR.
Profiles must be set up on both the BCSC online eServices portal and on SEDAR prior to the filings being made.
Securities regulators charge separate filing fees for Form 45-106F1. In B.C. and Ontario, fees are paid online when the form is submitted, while filing fees payable to other jurisdictions must be made through SEDAR.
A brief reminder that securities regulators have a different approach when sales of securities are made to managed accounts (i.e. to discretionary portfolio managers), as follows:
- In Manitoba and Québec, the Form 45-106F1 may be required to be filed and fees paid with respect to beneficial owners of securities, regardless of the location of the managed account (note as well that fees in Québec are based on the gross value of securities distributed in the Province);
- In other jurisdictions (including Saskatchewan through blanket relief), the Form 45-106F1 would generally be filed (and fees paid) based on the location of the discretionary adviser/managed account.
We would be pleased to assist our clients with investment funds prepare and file the required Form 45-106F1 for 2021 distributions by the January 30, 2022 deadline. We would strongly encourage clients to begin this process soon, or as early as possible in the new year, to avoid a potential late filing, as the process can be time consuming. There is typically a last-minute “filing crunch” towards the end of January, which can lead to a missed deadline.
November 30, 2021
Our colleagues at BLG have written a number of articles we thought might interest our readers, including the following:
For more information, please visit the BLG website.
November 30, 2021