Inventions, apologies, clean water and comedians. Canada is great at many things. Add to that list our tolerance for studies of our securities regulatory system. Here at AUM Law, we’ve been dipping into the initial consultation report (Report) of the Ontario government’s Capital Markets Modernization Task Force (Task Force). Like ice wine, the Report is better sipped than guzzled and so in this month’s bulletin we’ve highlighted a handful of proposals that we think will be of particular interest to readers of this newsletter.
Background: The Task Force began its work in February 2020 and since then has engaged with over 110 stakeholders to learn more about the challenges that businesses and investors face in Ontario’s capital markets. Now, the Task Force is seeking feedback on 47 proposals to supplement the policing function of Ontario’s capital markets regulatory framework with a public policy imperative to grow those markets.
Self-Regulatory Organizations (SROs): SRO reform is a hot topic. Adding to the proposals we discussed last month, the Task Force has its own recommendations, including those outlined below, to transform the regulatory framework for SROs and registered firms.
- Create a single SRO to regulate both investment fund dealers and mutual funder dealers and conduct national market surveillance.
- In the longer term, transfer all registration functions and oversight of all firms distributing products and providing advice to investors from the OSC to the SRO.
- Increase the OSC’s oversight over the existing SROs and any future SRO. For example, the OSC would approve SRO annual business plans and be able to veto significant publications (including rules and guidance) and key appointments.
- Link SRO executives’ compensation and incentive structures to their public interest and policy mandate, require SROs boards to include directors with investor protection experience, require a greater proportion of directors (including the chair) to be independent, and introduce cooling-off periods between working for a member firm and becoming an independent director of an SRO.
- The Task Force also is considering whether to recommend an ombudsperson service to address complaints that SRO member firms have about the services received from their SRO.
Capital-Raising: Many of the Task Force’s proposals, including the recommendations set out below, focus on making Ontario capital markets more attractive to issuers and investors:
- Expand the definition of accredited investor (AI) so that distributions under the AI exemption can be made to individuals who hold the CFA Charter or have completed other relevant proficiency requirements such as the Canadian Securities Course (CSC) exam, Exempt Market Products exam, or the Series 7 Exam plus the New Entrants Course Exam.
- Allow exempt market dealers (EMDs) to participate as selling group members in prospectus offerings and sponsor reverse takeovers (RTOs).
- Develop a regulatory framework for retail private equity investment funds, such as the “interval fund” concept in the United States. (An interval fund is a type of unlisted, closed-end fund that periodically offers to buy back a stated portion of its shares.)
- In the Report, the Task Force discusses the phenomenon of angel investor groups assisting with early stage financing of start-ups. According to the Report, angel investor groups consist of AIs who professionalize and share due diligence, domain knowledge, and expertise as they consider investing in early stage issuers. Some angel investor groups seek to be structured to earn a fee from working with their members to collaboratively finance these start-ups and such arrangements could, in some circumstances, trigger registration requirements. The Task Force recommends that the registration rules be changed so that angel groups can work with their AI members.
- Liberalize reporting issuers’ ability to pre-market transactions to institutional investors before filing a preliminary prospectus. This regulatory change would be combined with increased monitoring and compliance examinations by regulators of the trading of those who might have advance knowledge of an offering.
Ownership Transparency: The Task Force sets out several proposals that may be of particular relevance to institutional investors who hold securities of reporting issuers. For example:
- Decrease the ownership threshold for early warning reports decrease from 10% to 5%. Feedback is requested on, among other things, whether requiring passive investors to report ownership at the 5% threshold would create undue burden relative to the disclosure benefits.
- Require institutional investors whose investments exceed a certain dollar threshold to disclose on a quarterly basis their holdings in Canadian reporting issuers whose market capitalization is above a certain threshold.
A Bigger Sandbox: The Task Force recommends that the OSC Launchpad and the Financial Services Regulatory Authority (FSRA) create an Ontario Regulatory Sandbox to serve innovative start-ups operating across Ontario’s financial services sector. Ideally, the Ontario Regulatory Sandbox would expand into a Canadian Super Sandbox involving all provincial and federal financial sector regulators.
Other Recommendations: The summary above highlights only a handful of the Task Force’s recommendations. The Report also includes potentially high-impact proposals such as:
- Separating the OSC’s regulatory and adjudicative functions;
- Expanding the OSC’s investigative and enforcement powers;
- Providing greater rights for persons or companies affected by the OSC’s examinations and investigations, such as introducing a mechanism to ensure that the OSC’s questions or requests for documents are subject to a “reasonable and proportionate” threshold and enabling affected persons to apply to an OSC adjudicator to clarify investigation and examination-related orders; and
- Empowering the Ombudsman for Banking Services and Investments (OBSI) to issue binding decisions requiring a registered firm to pay compensation to harmed investors and increasing the limit on OBSI’s compensation recommendations;
What’s Next? The deadline for comments on the Report is September 7. The Task Force plans to deliver its final report to the Minister of Finance before the end of the year. After that, the Task Force’s proposals will become part of the mix of Ontario and Canada-wide reform proposals, including the OSC’s regulatory burden reduction initiative, establishment of the Cooperative Capital Markets Regulatory System, and the Canadian Securities Administrators’ agenda. We think that initiatives that can be implemented by Ontario authorities on their own could move forward fairly quickly, especially if no legislative or rule changes are required. Other proposals (such as SRO reform) will require coordinated, cooperative and determined actions by multiple parties across the country and are therefore likely to take much more time to achieve, if they are achievable at all.
AUM Law will continue to monitor the Task Force’s work and update you on significant developments. If you are interested in submitting a comment letter or wish to discuss the Report’s implications for your business, please do not hesitate to contact us.
July 31, 2020