Category: Corporate Finance
On February 11, 2022, the Financial Services Regulatory Authority of Ontario (FSRA) announced that it is consulting on guidance that outlines new educational requirements and new licence categories for mortgage agents and mortgage brokers transacting in private mortgages (the Guidance).
The Guidance sets out new proposed licence classes that would be effective April 1, 2023, being mortgage agent level 1, mortgage agent level 2, and mortgage broker. Mortgage agents with a level 1 licence would be permitted to deal and trade in mortgages provided by financial institutions (as defined by the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA)) and lenders approved by the Canada Mortgage and Housing Corporation (CMHC). Mortgage agents with a level 2 licence would be permitted to deal and trade in mortgages provided by financial institutions (as defined in the MBLAA), lenders approved by the CMHC, and all other lenders, such as mortgage investment corporations, syndicates, private individuals, brokers, and brokerages. Mortgage brokers would be permitted to deal and trade in mortgages provided by financial institutions, lenders approved by the CMHC and all other lenders. Mortgage brokers would also be permitted to supervise mortgage agents and could be appointed as the principal broker for a brokerage.
While a mortgage agent level 1 would not need any particular outlined experience, an applicant would have to complete the Mortgage Agent Level 1 Course and apply for a mortgage agent level 1 licence within two years of successfully completing the course. A mortgage agent level 2 would need to have at least 12 months experience over the last 24 months as a mortgage agent level 1 and complete the Mortgage Agent Level 2 Course and the Private Mortgages Course. A mortgage broker would need to have at least 24 months experience over the last 36 months as a mortgage agent level 2 and complete the Mortgage Agent Level 1 Course, Private Mortgages Course and the Broker Course.
There are a number of proposed transition periods for persons licensed under the current requirements which start April 1, 2023, and end March 31, 2024. Certain existing licensees with more than 5 years experience who wish to obtain the mortgage agent level 2 or mortgage broker license may be permitted to take a challenge exam in lieu of the Private Mortgages Course.
The Guidance also includes details on licensing fees, new continuing education requirements that are effective April 1, 2023, labour mobility between provinces, applications for education and experience equivalency, supervision approach and principles, and compliance and enforcement provisions.
Along with the Guidance, draft proposed amendments to the MBLAA reflecting the changes proposed in the Guidance have also been published.
If you have any questions regarding these proposed changes, please contact a member of our team.
March 31, 2022
In the Ontario 2021 Fall Economic Statement the Government of Ontario announced its intention to address tax evasion, money laundering and other illicit financial activities through amendments to the Business Corporations Act (Ontario) (the Amendments). The Amendments will require privately-held Ontario corporations to record the identities and details of all individuals who exercise significant control over those corporations. Corporations that offer securities to the public and their wholly owned subsidiaries will be exempt from these requirements.
The information requirements will apply to an individual (referred to as an “individual with significant control”) who: a) owns, controls or directs 25% or more of the voting shares of the corporation or shares that are worth 25% or more of the fair market value of all outstanding shares of the corporation; or b) has direct or indirect influence over the corporation without owning at least 25% of the shares. A person would also be caught by these requirements if they own or control a significant number of shares jointly with other people.
The information required to be maintained by the corporation of each individual with significant control includes: their name, date of birth and address, jurisdiction of residence for tax purposes, date of becoming or no longer being an individual with significant control, a description of how the person has significant control, and a description of the steps the corporation takes to keep the information current each year. Updates to the information would be needed at least once during each financial year of the corporation and within 15 days of the corporation becoming aware of a change in the relevant information.
The Amendments are to be effective January 1, 2023 and would bring Ontario in line with other Canadian provinces. If you have any questions about the Amendments or how they may impact your business, please contact us.
February 28, 2022
A number of CSA jurisdictions have begun their promised registrant reviews relating to the client-focused reforms. These jurisdictions have sent out very extensive questionnaires relating specifically to the conflicts of interest provisions that came into force at the end of June, 2021. The questions include those relating to the formation of a firm’s conflicts inventory, inquiries about fee arrangements and proprietary products, and ask for documentation and proof of changes made to policies and procedures to demonstrate compliance with the new requirements. We suspect the result of these reviews will result in further guidance to the industry on baseline regulatory expectations.
Registered firms with clients in Québec should also soon be hearing from the AMF, if they haven’t already. The AMF is currently conducting a normal course focused review with a number of questions being asked of firms that do not have a physical presence in Québec. The stated purpose of the review is to get a better understanding of a firm’s activities in the province.
In addition to regulatory reviews, the OSC has begun the process of individually reminding registrants of the 2022 risk assessment questionnaire (RAQ), which will be sent out in early May and is due by mid June. The 2022 RAQ will ask about information for the period ended December 31, 2021. While the questions are expected to be substantially similar to those in the 2020 RAQ and some fields that relate to information unlikely to change from year to year will be pre-populated, significant time and resources will still be required to complete all sections of the questionnaire fully. The OSC email includes a link to a copy of the 2020 questions in order to help get firms started on collecting the necessary information. The OSC will also be providing a list of FAQs and user guides for each section of the questionnaire and is setting up a webinar as part of its Registrant Outreach to be held in May. We would urge clients to begin thinking about and planning for this project. As the form requires certification from a firm’s UDP, it is important to leave enough time for the c to review the form prior to submission.
As a reminder, firms in Ontario that are registered as investment fund managers must also complete the OSC’s Investment Fund Survey (which has already been sent out) by April 29th.
We are assisting a number of clients with responding to these reviews, and we would be pleased to answer your questions about this or any other regulatory sweeps occurring.
February 28, 2022
There are two European developments we wanted to bring to your attention, somewhat confusingly referred to as SDR (Settlement Discipline Regime) and SRD II (Shareholder Right Directive).
SDR concerns the European Union’s (EU) Central Securities Depositories Regulation (CSDR). The common requirements apply to central security depositories that operate across the EU. SDR introduces a number of measures to prevent trade settlement fails by ensuring that all transaction details are provided to facilitate settlement and incentivises timely settlement by cash penalty fines. Canadian firms trading securities that ultimately settle at a CSD domiciled in the EU may be subject to these rules and, consequently, also potentially the fines.
SRD is a directive that concerns the EU’s requirements related to transparency and corporate governance. Provisions include those relating to the remuneration of directors, identification of shareholders (for engagement purposes), facilitation of exercising shareholder rights, and the transmission of information. Some of these provisions may apply to particular parties that transact with securities that are in-scope (e.g. traded on a European exchange).
February 28, 2022
On November 19, 2021, the Honourable Peter Bethlenfalvy, Minister of Finance of Ontario, requested that the Ontario Securities Commission (the OSC) undertake an analysis of questions regarding the practice of tied selling raised by the Capital Markets Modernization Taskforce (the Taskforce) in their consultation in 2020. In response, on November 30, the OSC issued OSC Staff Notice 33-753 OSC Consultation on Tied Selling and other Anti-Competitive Practices in the Capital Markets (the Notice).
The Notice requested submissions and supporting evidence and analysis from issuers, dealers and other market participants as well as from investors and other stakeholders in order to establish the extent to which tied selling may be impeding competition. More specifically, the Taskforce identified concerns that certain commercial lenders might be engaging in practices that impede competition such as where a lender requires issuer clients to retain the services of a dealer or adviser affiliate of the lender for their capital raising and/or advisory needs as a condition of entering into a commercial transaction, or vice versa.
The Notice included a series of specific questions that the OSC would like feedback on from academic and regulatory experts and professional advisors. The OSC asked to receive submissions in response to the Notice by January 10, 2022. The OSC then plans to incorporate the submissions in its report to the Minister by February 28.
January 29, 2021
Related to OSC Staff Notice 33-753 OSC Consultation on Tied Selling and Other Anti-Competitive Practices in the Capital Markets, on December 7 the Ontario Securities Commission (the OSC) commenced a desk review, also known as the OSC Product Review Sweep (the Sweep), of many large Ontario-based financial institutions and some independent firms. The Sweep was initiated following a Letter of Direction from the Honourable Peter Bethlenfalvy, Minister of Finance of Ontario, to the Chair of the OSC. The Letter of Direction expressed concerns about some of Ontario’s largest financial institutions halting sales of third-party investment products. The letter noted that some financial institutions had signaled that the measures to restrict shelf space were in response to the Client Focused Reforms.
In response to the Letter of Direction, the OSC commenced the Sweep and requested detailed information from the targeted firms by January 6, 2022. The information request included questions on general business information about the firm, related products, third-party products, shelf composition, and managed solutions. The OSC also provided a detailed template of information to be completed with the review. The OSC plans to incorporate the information in its report to the Minister by February 28.
January 31, 2022
On January 13, 2022, the Canadian Securities Administrators (the CSA) published CSA Notice of Publication – Amendments to National Instrument 52-108 Auditor Oversight (the Notice), containing the final amendments introducing new rules intended to regulate the conduct of certain audit firms performing audits of Canadian public issuers (the Amendments).
The Amendments are intended to address challenges that the Canadian Public Accountability Board (CPAB) faces in accessing audit work performed by audit firms that are not directly subject to Canadian regulatory oversight. Such challenges could arise, for example, in circumstances where the main audit firm (the audit firm that issues the audit report, or the “participating audit firm” or “PAF”) retains the services of a foreign audit firm to complete a portion of the audit. Under the current regime, CPAB experiences difficulty accessing the audit materials and records of such foreign auditors.
The Amendments introduce a new definition of a “component auditor”, having the same meaning as it does in Canadian GAAS, which essentially refers to an auditor that performs an audit over a “component” (e.g. a foreign subsidiary of the public issuer). A “significant component auditor” is a component auditor where:
- the component auditor performs audit work involving financial information related to a component of the reporting issuer;
- the reporting issuer being audited has the power to direct the component on its own or jointly with another person; and
- the component auditor meets one of the quantitative metrics relating to hours of work, fees paid, or relative size of the component’s assets or revenue set out in the Amendments.
The Amendments then require a reporting issuer to give written notice to a significant component auditor permitting it to provide access to records relating to its audit work to CPAB, and to enter into a “CPAB access agreement” with CPAB if CPAB issues a notice that it was unable to access the significant component auditor’s records.
If the significant component auditor fails to enter into such an agreement, the PAF will be prohibited from using the significant component auditor in future.
In coordination with the publication of the Notice, CPAB released its own publication, entitled Guidance regarding CPAB’s process for requirements in NI 52-108 related to access to working papers of significant component auditors in foreign jurisdictions (the Guidance).
In the Guidance, CPAB states that, when deciding whether to request access to a significant component auditor’s records, it will consider factors including:
- the number of component auditors and the relative significance of their audit work to the inspection focus areas;
- the nature and extent of the audit work;
- the oversight by the PAF; and
- the evidence retained in the group audit file.
Furthermore, CPAB clarifies that it will only request access to a significant component auditor’s working papers that directly relate to its review of the PAF audit file, and not seek access to inspect the component auditor’s system of quality controls.
If there is a memorandum of understanding or similar agreement in effect with the local audit regulator of the significant component auditor’s jurisdiction, CPAB will first utilize such mechanism before resorting to the process set out in the Amendments.
These mechanisms ultimately leverage the relationships that the public issuer has with the PAF and the significant component auditor to achieve the objectives of access to relevant records.
If you have any questions about the Amendments, the Guidance or about how the new rules may affect you, please do not hesitate to contact any member of our team.
January 31, 2022
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
For those looking for some new reading material, a Capital Markets Act (the “Act”) draft has been released by the Ontario Ministry of Finance. The Act is intended to replace both the current Ontario Securities Act as well as the Ontario Commodity Futures Act, and is responsive to many of the recommendations made in the final report of the Capital Markets Modernization Taskforce (the Taskforce) released in January of this year. Unlike some of the current legislation, the new Act sets out a “platform” framework, where the legislation governing securities and derivatives will be set out, but the detailed requirements will be left to rules, in order to promote flexibility and allow the OSC to respond to market developments in a timelier manner. The Act will be expanded as suggested by the Taskforce to include in the OSC’s mandate fostering capital formation and competition in capital markets.
The Act will set out the OSC’s powers as well as those of the new Capital Markets Tribunal, which will have adjudicative powers separate from the OSC’s regulatory powers, the latter of which would be exercised by its board or the newly titled Chief Regulator/CEO. A new position, that of Chief Adjudicator, will be responsible for directing the Tribunal’s operations. Further to other legislation released earlier this year, the current Chair and CEO functions at the OSC will also be separated into two positions. If the Act goes forward, commodity futures contracts and commodity futures options would be regulated as derivatives under the Act. A new section in the Act will regulate trading in derivatives, including permitting the OSC to make rules imposing registration requirements on OTC derivatives dealers and advisers.
The Ministry has set out 30 consultation questions throughout its commentary on the new Act, seeking feedback on matters ranging from the appropriate statutory civil liability for distribution of ETF securities, to the impact of including the independent review committee of a private fund to the definition of a “market participant”, to the appropriate requirements for managing conflicts of interest. The deadline for providing comments is January 21, 2022, and we will be providing further analysis and commentary on the draft Act and its implications in upcoming publications.
October 29, 2021
The Canadian Public Accountability Board (CPAB) is seeking comments on potential changes to the type of information it discloses about the results of its assessments of accountants that audit Canadian reporting issuers. Currently, the rules governing CPAB restrict the sharing of inspection findings for individual firms to limited circumstances or with the consent of all impacted parties. The current Protocol for Audit Firm Communication of CPAB Inspection Findings with Audit Committees (Protocol) is voluntary in nature.
CPAB is considering certain disclosure principles, against which any changes are to be evaluated. The principles include improvements in audit quality, timeliness of CPAB reporting and remediation of audit deficiencies, public accountability and cost vs benefit considerations. The consultation seeks input with respect to communication of findings to an issuer’s audit committee, how much information should be included in CPAB’s public reports and whether CPAB should publicly report on its enforcement actions.
With respect to communication with audit committees, the current Protocol allows audit firms to choose to share the results of individual file inspections with the audit committee, although not all audit firms participate in the Protocol. The consultation asks whether the rules should be amended to mandate the sharing of the results of individual audit file inspections with the audit committee, and if such a requirement should apply to all reporting issuers. For public disclosure, CPAB currently publishes two reports a year, which provide a summary of inspection themes and recurring issues, but does not publish its findings individually by firm, and is seeking input on whether and how to do so. Lastly, CPAB seeks comment on whether it should make its enforcement actions public – to date, they have not done so – and with respect to the nature and breadth of such disclosure. CPAB has created a short survey as a potential alternative to comment letters, which are due by the end of September.
September 30, 2021
Effective October 19, 2021, the Government of Ontario has indicated that the Ontario Business Registry will be launched and available for filing voluntary dissolutions under Part XVI of the Business Corporations Act (Ontario). Importantly, consent of the Ministry of Finance will no longer be required as part of the process. The change will reduce the time required for dissolving an entity, as in the past receipt of the Ministry of Finance’s consent often required 4-6 weeks. Other aspects of the voluntary dissolution process will remain the same. Specifically, the dissolution must be authorized by a special resolution passed at a meeting of the shareholders or with the consent in writing of all the shareholders entitled to vote at such meeting. Additionally, the debt, obligations, and liabilities of the corporation, including any tax liability, must be discharged and the Articles of Dissolution must be signed by a director or officer of the corporation. If you are considering dissolution for one of your entities or would like to discuss the dissolution process, please do not hesitate to contact us.
September 30, 2021
On August 18, the Financial Services Regulatory Authority of Ontario (FSRA) released a consultation paper on its draft interpretation relating to a license exemption for mortgage transactions between sophisticated entities. The draft provides FSRA’s interpretation of an exemption from licensing under the Mortgage Brokerages, Lenders and Administrators Act, 2006 that applies to non-individual permitted clients that deal or trade in mortgages with or lend exclusively to other non-individual permitted clients. The exemption is available on the premise that the risk of consumer harm is limited as such transactions do not involve individual consumers and non-individual permitted clients are presumed to have sufficient experience and knowledge, as well as the financial resources, to manage the risks of mortgage-related investment transactions. The interpretation guidance confirms that FSRA will generally look to the definition of a “permitted client” under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations for this purpose, and that a non-individual should also refer to that definition as to whether they satisfy the intent of what would qualify as a non-individual permitted client (which FSRA indicates is not exhaustive). The draft interpretation guidance also provides examples of the type of transactions that would fit within the ambit of the exemption.
September 30, 2021
On July 28, 2021, the Canadian Securities Administrators (CSA) announced a proposed new prospectus exemption for issuers listed on a Canadian stock exchange. The proposal is in response to comments received from CSA Consultation Paper 51-404 Considerations for Reducing Regulatory Burden for Non-Investment Fund Reporting Issuers, and reflects research on capital raising requirements in other countries as well as other stakeholder feedback about the prospectus system. The proposed Listed Issuer Financing Exemption is expected to reduce costs for issuers that would otherwise raise small amounts of capital through the public markets, usually through a short-form prospectus offering. The new exemption is expected to be used by such issuers as an alternative to the accredited investor and family, friends, and business associates prospectus exemption. The exemption would not be available to issuers that have been a reporting issuer for less than 12 months, nor to issuers that have not filed all continuous disclosure documents required under Canadian securities legislation. In addition, the exemption could not be used by an issuer whose principal assets are cash or its exchange listing, nor by an issuer that intends to use the proceeds for a significant transaction such as an acquisition that would require shareholder approval, on the basis that the issuer’s existing business should already be adequately described in its current disclosure documents.
To avail themselves of the proposed exemption, eligible issuers would need to file a short offering document (not expected to be longer than 5 pages) updating the existing public disclosure, including with respect to any new developments in the issuer’s business, and confirming that the issuer will have sufficient funds for at least 12 months after completion of the offering. Issuers could raise up to the greater of $5 million or 10% of the issuer’s market capitalization, to a maximum of $10 million, annually. In addition, the offering can not result in more than 100% dilution for existing shareholders. Purchasers under the exemption would have rights under the secondary market civil liability regime, and would also have a contractual right of rescission against the issuer for a period of 180 days in the event of a misrepresentation. As with many prospectus exemptions, the issuer would be required to report sales by filing a Form 45-106F1 Report of Exempt Distribution, but would not be required to complete the schedule that contains the names of the purchasers. If you have any questions about the availability of the proposed exemption or would like to comment on the consultation, please contact us.
August 31, 2021
On August 12, the Canadian Securities Administrators (CSA) released proposed amendments to the Companion Policy to National Instrument 41-101 General Prospectus Requirements that provides an interpretation of the financial statements that are required to be included in a long form prospectus where the issuer has or proposes to acquire a business that would be the primary business of the issuer. The existing requirements are intended to provide investors with information on the financial history of the issuer, even if the issuer’s history included multiple legal entities. In practice, many issuers have pre-filing consultation discussions with the regulators to determine exactly which financial statements are required to be included in the prospectus, which is a time consuming and costly exercise. The clarifications are intended to reduce the need for such consultations, including by explaining the regulators’ interpretation of a “primary business” and “predecessor entity”, and the time periods for which financial statements would be required. Helpfully, the proposed amendments include a number of examples of when a reasonable investor would consider an acquisition to be the “primary business” of the issuer and runs through the resulting expectations for inclusion of various financial statements. Comments on the proposed guidance are due by October 11.
August 31, 2021
The Canadian Derivatives Clearing Corporation (CDCC) has proposed amendments to its Rules, Operations Manual, Risk Manual and Default Manual to introduce the Gross Client Margin Model (GCM). The changes being proposed by the CDCC are intended to align with international standards on segregation and portability for futures accounts, namely Principle 14 of the Principles for Financial Market Infrastructures. Portability of client positions and collateral is the alternative to closing out the positions upon the insolvency of a clearing participant. The GCM model is a method of calculating the margin a clearing participant must post where the amount is the sum of the margin requirements for each client (i.e., its not a net calculation).Each clearing member would need to report client positions on a daily basis to determine the initial margin requirement. The purpose of the amendments is to allow each client equal protection from the CCDC, regardless of the credit quality of the respective clearing members. The GCM model is to be undertaken in phases and implemented in the second quarter of 2022.CDCC does not initially expect a large impact on stakeholders, as the GCM model is already used for the U.S. market.
The Investment Industry Regulatory Organization of Canada (IIROC) has proposed changes to its own rules and Form 1 relating to the futures segregation and portability protection regime, relating to the CDCC proposal. IIROC’s changes are also intended to make it easier to port client positions and the value of posted collateral in the event of a default of a clearing participant. The changes to IIROC’s rules are required because the CDCC model is separate from the existing IIROC-CIPF model, and the purpose of the amendments is to reduce “funding drain” on dealers and reduce linkages between a dealer’s futures business and securities business – i.e., the possibility that dealers would have to utilize margin from other accounts in order to post the higher requirements for futures that will be required under the CDCC model. The rules include additional client disclosure and daily reporting to IIROC to identify gross customer margin futures positions. The CGM model allows CDCC to port positions more quickly, but may result in higher margin requirements and restrictions on cross-product hedges involving futures for some institutional participants. To mitigate this impact, the proposals allow one business day grace period to collect margin calls. Comments on the CDCC proposal are due by September 3, and IIROC is accepting comments until shortly thereafter on September 7.
August 31, 2021