Month: January 2023

Bulletin | Penguin Awareness Edition | January 2023

In this bulletin:

  1. Changes to Offering Memorandum Prospectus Exemption – Will New Issues be Grounded?
  2. Ontario’s Exempt Market (But Not Penguins) See Continued Growth
  3. FSRA Announces Consultation on Proposed Guidance on IT Risk Management – Filtering Out the Salt
  4. Can’t Stay on an Island – CSA Publishes Amendments Relating to Institutional Trade Matching and Settlement

In Brief: Not All Penguins Are Short: Short Selling in Canada Consultation ▪ Review of IIROC Arbitration Program – No Camouflage ▪ A Little Breathing Room – FSRA Announces Additional Time to Comply with Title Protection Framework in Ontario ▪ All Things Endangered – AMF Proposes DSC Ban for Segregated Funds ▪ Penguins Can’t Complain – AMF Re-Releases Draft Regulation on Complaint Processing

Important Reminders: New Year’s Survey: Investment Fund Managers

BLG’s Resource Corner


Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> AUM Law Bulletin | Penguin Awareness Edition | January 2023


Changes to Offering Memorandum Prospectus Exemption – Will New Issues be Grounded?

On December 8, 2022, the Canadian Securities Administrators (CSA) published amendments (the Amendments) to National Instrument 45-106 Prospectus Exemptions relating to the offering memorandum (OM) prospectus exemption (the OM Exemption). The Amendments will impose significant new and additional disclosure requirements on issuers that are engaged in “real estate activities” (Real Estate Issuers) and issuers that are “collective investment vehicles” (CIVs). The Amendments are intended to clarify the disclosure framework for Real Estate Issuers and CIVs, with the objective of providing better information for investors. We wrote about the proposed amendments (the Proposals) when they were introduced in September 2020.

The Amendments are expected to take effect on March 8, 2023.

1. New Requirements for Real Estate Issuers

The Amendments define “real estate activities”, subject to certain exceptions, as activities, the primary purpose of which is to generate for security holders income or gain from the lease, sale or other disposition of real property. The definition includes property development and real estate activities conducted by subsidiaries of the issuer. Activities relating to mineral, oil and gas projects are excluded from the definition, as are in Québec activities relating to the forms of investments subject to the Regulation Respecting Real Estate Prospectus and Registration Exemptions (Québec).

Independent Appraisal: The Amendments require Real Estate Issuers relying on the OM Exemption to provide to the purchaser, and file with the relevant securities regulatory authorities, an independent appraisal of an interest in real property if one or both of the following apply:

  • the issuer proposes to acquire an interest in real property from a related party and a reasonable person would believe that the likelihood of the issuer completing the acquisition is high;
  • a value for an interest in real property is disclosed in the OM (other than in the financial statements).

Unlike the Proposals, the appraisal requirement no longer applies to a completed acquisition of an interest in real property from a related party. Similarly, the appraisal requirement will not apply only if the issuer intends to spend a material amount of the proceeds from the offering on an interest in real property.

New Disclosure Schedule: Subject to the de minimis exemption noted below, OMs for Real Estate Issuers relying on the OM exemption will have to include the disclosure required by new Schedule 1 to Form 45-106F2 – Additional Disclosure Requirements for an Issuer Engaged in Real Estate Activities. The schedule applies to each interest in real property held or proposed to be acquired by the issuer (provided a reasonable person would believe that the likelihood of the issuer completing the acquisition is high) and includes the following:

  • a detailed description of each property including disclosure of material encumbrances, current and proposed use and occupancy levels;
  • detailed disclosure about real estate development projects, such as costs, objectives, timelines and any required approvals;
  • the purchase and sale history of real property involving a related party;
  • penalties, sanctions, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for parties such as the developer; and
  • information about any future cash calls required by investors.

De Minimis Exemption: Most of the disclosure requirements in Schedule 1 will not apply to an interest in real property, or to more than one interest in real property taken together, that when considered in relation to all interests in real property held by the issuer, is not significant enough to influence a decision by a reasonable investor to buy, hold or sell a security of the issuer.

2. New Requirements for Collective Investment Vehicles

The amendments define “collective investment vehicle” as an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities other than securities of subsidiaries of the issuer. Issuers that hold portfolios of mortgages, other loans, or receivables would be considered CIVs. The definition also includes investment funds, to the extent they are permitted to use the OM Exemption.

New Disclosure Schedule: New Schedule 2 to Form 45-106F2 – Additional Disclosure Requirements for an Issuer That is a Collective Investment Vehicle will require such issuers to disclose in the OM, among other things:

  • the issuer’s investment objectives, strategy and investment criteria;
  • detailed description of the portfolio;
  • portfolio performance information;
  • disclosure of penalty, sanction, criminal or quasi-criminal proceedings, and/or bankruptcy or insolvency proceedings for persons involved in the selection and management of the investments; and
  • conflicts of interest.

January 31, 2023

Ontario’s Exempt Market (But Not Penguins) See Continued Growth

On December 7, 2022, the Ontario Securities Commission (OSC) published OSC Staff Notice 45-718 – Ontario’s Exempt Market, a report on capital raised through prospectus exemptions in the province between 2019 and 2021 (the Report). The scope of the Report is limited to non-investment fund issuers (e.g., corporate issuers) and focuses on highlighting key annual trends in exempt market financing activity in Ontario for both investors and issuers. The Report highlights that despite volatility and disruptions in the markets caused by the COVID-19 pandemic, capital raising activity in Ontario’s exempt market has continued to grow since 2019. In fact, in 2021, the use of prospectus exemptions to raise capital almost doubled its pre-pandemic value, hitting a record high of $175 billion.

Key findings in the Report include the following:

  • Ontario’s exempt market continues to be primarily composed of institutional investors, accounting for approximately 98% of the capital raised.
  • A majority of the capital raised through the exempt market was through institutional investment in foreign and U.S.-based issuers, with much of it being in debt-related offerings.
  • In 2021, there were more foreign-based issuers that raised capital from Ontario investors than Canadian issuers.
  • Individual investors predominately invested in Ontario and other Canadian issuers, with the majority of investments being made in equity securities.
  • Real estate and mortgage-related investments continue to attract an increasing share of individual investor capital, growing from approximately 37% in 2019 to 43% in 2021.
  • The most used prospectus exemption continues to be the Accredited Investor Exemption for both individual and institutional investors. However, there has also been an increase in the use of the Offering Memorandum Exemption (OM Exemption) and the Family, Friends and Business Associates Exemption (FFBA Exemption). The OM Exemption continues to be predominately used by real estate and mortgage issuers, while the FFBA Exemption was most used by non-financial issuers, especially mining issuers.

It will be interesting to see if the OM Exemption continues to be as popular following the amendments impacting issuers engaged in real estate activities and collective investment vehicles, which we describe further in the article above.

If you have any questions regarding accessing the exempt market to raise capital or the specifics of any prospectus exemption, please contact us. For more information, please see BLG’s summary on the report notes in “BLG’s Resource Corner” below.

January 31, 2023

FSRA Announces Consultation on Proposed Guidance on IT Risk Management – Filtering Out the Salt

The Financial Services Regulatory Authority of Ontario (FSRA) published proposed guidance on IT risk management (the Guidance) for consultation. The Guidance is intended to help FSRA regulated sectors and individuals effectively manage a threat to their IT systems, infrastructure and data.

The Guidance includes a segment applicable to all entities and individuals regulated by FSRA that sets out information about existing regulatory requirements, practices for effective IT risk management and a process for regulated entities and individuals to notify FSRA in the event of a material IT risk incident. The Guidance also includes sector-specific content that provides additional guidance and interpretations of requirements for particular sectors, including mortgage brokerages. The Guidance provides a principles-based approach that offers regulated entities and individuals the flexibility to achieve the outcomes in a manner that is suitable for the size and nature of their business.

The Guidance outlines the following seven practices to effectively manage IT risk and sets out the criteria FSRA will use to assess compliance with each practice:

  1. Governance – proper governance and oversight of IT risk
  2. Risk Management – policies and procedures in place to manage IT risk
  3. Data Management – strategies to manage and secure confidential data
  4. Outsourcing – controls in place to effectively manage risks related to outsourcing
  5. Incident Preparedness – processes in place to detect, manage, resolve and recover from an IT incident
  6. Continuity and Resiliency – ensure the continuity of IT assets to enable delivery of services following an incident
  7. Notification of Material IT Risk Incidents – notification to regulator(s) in the event of a material IT risk incident

The consultation period is open until March 31, 2023.

January 31, 2023

Can’t Stay on an Island – CSA Publishes Amendments Relating to Institutional Trade Matching and Settlement

The Canadian Securities Administrators (CSA) recently published for comment proposed amendments to National Instrument 24-101 Institutional Trade Matching and Settlement (NI 24-101). The proposed amendments would allow for the shortening of the standard settlement cycle for institutional equity and long-term debt market trades from T+2 to T+1. The amendments follow the lead of the U.S Securities and Exchange Commission (SEC) which, in February 2022, voted to shorten the settlement cycle for US equities to T+1.

Registered dealers and advisers trading on a delivery against payment or receipt against payment basis (DAP/RAP) for or with an institutional investor must match a DAP/RAP trade as soon as practical after the trade is executed, but currently by noon on T+1 (ITM deadline). In consideration of this move by the SEC, the CSA also proposed amendments to the ITM deadline from noon on T+1 to 9PM on the trade date. With the proposed advent of T+1, the CSA clarified their view that allowing matching to occur until noon on T+1 would leave insufficient time to address issues that may occur with the processing of trades.

In addition, the amendments propose to permanently repeal the exception reporting requirement which, as noted in our April 2020 bulletin article, has been suspended since the CSA moratorium came into effect on July 1, 2020. The reporting requirement would have otherwise necessitated the filing of a Form 24-101F1 by registered dealers and advisers if less than 90% of trades executed by or for the firm in the preceding quarter matched within the timing deadlines. CSA Staff agreed with the consensus of stakeholders who indicated that the exception reporting requirement was overly burdensome while achieving limited utility. While the amendment contemplates the removal of the exception reporting requirement and use of Form 24-101F1, applicable firms will still need to ensure their operations comply with other requirements of NI 24-101, including having policies and procedures to achieve the matching threshold for institutional trades.

Concurrently, the CSA also published Staff Notice 81-335 – Investment Fund Settlement Cycles in which the CSA announced that they were not proposing to amend National Instrument 81-102 Investment Funds (NI 81-102) to shorten the settlement cycle for primary distributions and redemptions of mutual fund securities in line with the proposed amendments to NI 24-101 discussed above.

The CSA highlighted the importance of allowing flexibility for individual mutual funds to evaluate whether a T+1 settlement cycle would make sense for their operations, acknowledging that a requirement of T+1 in NI 81-102 would impair that flexibility. This decision, while encouraging mutual funds to voluntarily settle primary distributions and redemptions on a T+1 cycle where practicable, leaves latitude for fund managers to decide what settlement cycle is right for their funds.

Firms may need to review their procedures and processes in consideration of these proposed changes. The deadline for comments on the amendments to NI 24-101 is March 17, 2023, with changes not expected to take effect until 2024.

January 31, 2023

Not All Penguins Are Short: Short Selling in Canada Consultation

The Canadian Securities Administrators (CSA) and IIROC (as it was then known) released Joint CSA and IIROC Staff Notice 23-329: Short Selling in Canada (Staff Notice).The Staff Notice states that the CSA and IIROC believe it is time to review the regulatory framework, to ensure it is appropriate given the evolution of markets and public feedback received. A second publication by the CSA sets out a summary of comments and responses to the original CSA Consultation Paper 25-403 Activist Short Selling (the Prior Consultation Paper).

The consultation is a follow-up to the Prior Consultation Paper. It is an interesting read, as it reviews the current securities regulations and SRO rules governing short selling in Canada, which includes National Instrument 23-101 Trading Rules, IIROC’s Universal Market Integrity Rules, and securities legislation that prohibits activities that are manipulative and/or deceptive. Based on further review since the first request for comments, the CSA and IIROC have determined that (i) the current regulatory regime is consistent with the principles for the effective regulation of short selling as set out by the International Organization of Securities Commissions; and (ii) the regulators did not receive any specific evidence of issues from activist short selling campaigns.

Nevertheless, a number of specific questions are set out in the Staff Notice with respect to whether there have been any changes in the Canadian market to support the introduction of new requirements at this time. These potential new requirements could include, for example, the requirement for a dealer to confirm the ability to pre-borrow securities prior to accepting a short sale order. The Staff Notice also revisits whether additional public transparency requirements of short selling activities or short positions should be considered, including specifically for junior issuers.

Comments can be provided until March 8, 2023.

January 31, 2023

Review of IIROC Arbitration Program – No Camouflage

IIROC released a consultation paper in December regarding its arbitration program, which was last reviewed in 2011. The program requires investment dealers to participate in binding arbitration to settle disputes upon the request of a client.

The consultation is a response to a number of recommendations that had been made by an independent working group of members of investor advocates, the investment industry and arbitration professionals who reviewed the current IIROC program. IIROC is now seeking feedback from the public on these recommendations, as well as the role of the program and its coexistence with other dispute resolution options. This consultation is open for comment until March 6.

The working group came up with seventeen recommendations – some of them involved changes that could immediately be put in place, but also others would require further public consultation. For example, recommendations that could have short-term implementation included revising program materials to ensure they include plain language, as well as increase public awareness of the program.

Other suggestions from the working group included allowing parties to choose their own arbitrator and establishing shorter timelines for case resolution in appropriate situations. A pilot program was suggested for certain procedural changes, including allowing case management and requiring mediation. Further public consultation would be required for items such as the potential publication of arbitration decisions and an increased award limit.

IIROC (now, together with the MFDA, the New Self-Regulatory Organization of Canada), proposes to maintain the program alongside the dispute resolution services provided by the Ombudsman for Banking Services and Investments (OBSI). It is noted that the arbitration program is not intended to draw away from OBSI, and that it is distinctive from those services. The arbitration program has always been intended to be an alternative to litigation yet focus on complex and large claims. As a result, IIROC is considering having the program operate only for claims above the OBSI limit, except in the Province of Québec.

January 31, 2023

A Little Breathing Room – FSRA Announces Additional Time to Comply with Title Protection Framework in Ontario

The Financial Services Regulatory Authority of Ontario (FSRA) announced in December that it was giving industry participants that use the title of “financial advisor” or “financial planner” more time to comply with its Financial Professionals Title Protection Framework. As most recently reported in our March 2022 bulletin, individuals operating in Ontario can not use those titles, or any title that can reasonably be confused with those titles, without holding a recognized credential from a FSRA approved credentialing body. FSRA indicated it was currently focused on approving credentialing bodies and expects that this will continue until the end of June 2023. The announcement stipulated that FSRA’s enforcement activities with respect to non-compliant title users will involve requesting such persons to voluntarily cease the use of such titles within 30 days. FSRA noted that it is in discussions with the New Self-Regulatory Organization of Canada and the Ontario Securities Commission about an oversight framework, should the New SRO apply to become a credentialing body. Further, FSRA intends to publish a summary of approval terms and conditions for all approved credentialing bodies early in 2023.

January 31, 2023

All Things Endangered – AMF Proposes DSC Ban for Segregated Funds

The Autorité des marchés financiers (AMF) recently released a draft regulation that would prohibit the use of deferred sales charges when withdrawing or transferring funds from or changing purchase options in an individual variable insurance contract relating to a segregated fund. The proposed ban is part of the AMF’s broader fair treatment of clients initiative and would apply to insurers authorized under Québec’s Insurers Act and firms, independent representatives and independent partnerships registered under the Province’s Act respecting the distribution of financial products and services. The draft regulation would impact all individual variable insurance contracts relating to segregated funds entered into as of June 1, 2023. In the view of the AMF, sales practices involving DSCs are contrary to the fair treatment of clients. The AMF would also be authorized under the regulation to impose various administrative penalties for breach of the regulation, in the amount of $1,000 for a natural person and $5,000 on an authorized insurer that requires such prohibited fees. The regulation is expected to come into force on June 1, 2023, subject to Ministerial approval. Comments on the draft regulation are due by January 31, 2023.

January 31, 2023

Penguins Can’t Complain – AMF Re-Releases Draft Regulation on Complaint Processing

The Autorité des marchés financiers (AMF) released another draft regulation relating to complaint handling, which is being published for comment for the second time. The draft regulation respecting complaint processing and dispute resolution in the financial sector is intended to harmonize and support the fair processing of complaints in Québec’s financial sector so that there is a common set of rules and practices followed by financial institutions, financial intermediaries and credit assessment agents. In particular, the AMF wishes to ensure that the analysis of such complaints enables those parties to identify recurring issues relating to their activities and take appropriate action to address them.

The revised draft has broadened the definition of a “complaint”. For financial institutions and financial intermediaries, a communication meeting all of the following conditions will be a “complaint”:

  • it expresses a reproach or dissatisfaction in respect of a service or product offered by the financial institution or financial intermediary;
  • it is communicated by a person who is a member of the clientele of the financial institution or financial intermediary; and
  • the complainant expects a final response within the meaning of the draft regulation.

The proposed regulation would provide greater flexibility to settle certain complaints verbally if they can be handled within 10 days following receipt of the complaint. The AMF is proposing to keep the 60-day time period for processing a complaint, while allowing for a 30 day extension in circumstances that are exceptional or beyond the control of the institution. An example provided includes a situation where the analysis of a complaint requires the receipt of documents or information from persons who are not parties to the complaint. The consultation is open until February 6, 2023.

January 31, 2023

Important Reminders: New Year’s Survey: Investment Fund Managers

By the time you are reading this reminder, investment fund managers registered in Ontario will have received the 2023 Investment Fund Survey from the Ontario Securities Commission (OSC). As stated by staff, access to the data requested will allow them to proactively monitor the health of the investment fund industry and will assist in the development of a risk identification framework.

Responses are due by April 28, 2023, and are for the period ending December 31, 2022. A page has been set up on the OSC’s website with additional information. By January 30, 2023, investment fund managers should have already submitted the Investment Fund Manager Form, which requested high-level profile information about the managers.

This survey is similar to the previous one in 2022, and includes questions relating to liquidity, leverage and asset class exposure. The spreadsheet must be completed for investment funds (including private funds) with net asset values of at least $10 million as of December 31, 2022, although the survey excludes labour sponsored investment funds and scholarship plans. Data may be confidentially shared with other regulatory agencies, and the results of the survey are published annually.

It is noted on the OSC’s website that future surveys may not have a $10 million threshold for inclusion, and thus as early as next year, investment fund managers may be required to report on all of their funds.

The information requests made in the survey may require a substantial amount of time to complete, and we recommend that clients begin that process now. As always, we remain available to assist if you have any questions or wish to talk through your responses.

January 31, 2023

BLG’s Resource Corner

Our colleagues at BLG have provided the following insights we thought might interest our readers:

January 31, 2023

OSC Announces New Registrant Advisory Committee Members – AUM’s Richard Roskies Included

On December 16, 2022, the OSC announced the members of the Registrant Advisory Committee (RAC) for the 2023-2024 term. The RAC is composed of members representing the different registration categories and business models overseen by the OSC, including firms with retail investors. We’re very pleased to announce that our very own Richard Roskies (Senior Legal Counsel) has been included on the committee. To read more, and see the complete list of members, the press release can be found here.

January 31, 2023

AUM Law Team Members Announcements

We are delighted to welcome Ruoxi Cai as a Lawyer to AUM Law. Ruoxi’s practice focuses on securities law, specifically regulatory compliance for registrants. Before joining AUM Law in 2023, she worked at Primerica Financial Services as a senior legal counsel engaged in general corporate and investment fund matters. Ruoxi was called to the bar of Ontario in 2018.

We are also thrilled to welcome Peter Gilmore as a Lawyer at the firm. In his role, Peter’s practice also focuses on securities law, most specifically regulatory compliance for registrants. Before joining AUM Law in 2022, he worked at the Mutual Fund Dealers Association of Canada (MFDA) for a number of years, most recently as enforcement counsel and enforcement policy counsel. Peter was called to the Bar of Ontario in 2022.

January 31, 2023