In our July 2020 Bulletin we reported on the Consultation Report of Ontario’s Capital Markets Modernization Taskforce. On January 22, the Taskforce released its Final Report after engaging with over 110 stakeholders and receiving over 130 stakeholder comment letters in response to the Consultation Report.
Background: The Taskforce was appointed by Ontario’s former Finance Minister to review the capital markets regulatory framework and make recommendations to modernize Ontario’s capital markets regulation. One of the Taskforce’s main objectives was to amplify growth and competitiveness in Ontario’s capital markets.
As we did in our July 2020 Bulletin when we last reported on the Consultation Report, in this month’s bulletin we have highlighted the proposals that we think will be of particular interest to readers who are following this initiative.
Improving Regulatory Structure: The Final Report sets out a number of recommendations which the Taskforce believes will lead to a more modern and efficient securities regulator including:
- Replacing the Securities Act (Ontario) and Commodity Futures Act (Ontario) with the Capital Markets Act (CMA). The recommendation is to see the implementation of the CMA by the end of 2021. As for this timing … we’re betting on the Over.
- Expanding the mandate of the OSC to include fostering capital formation and competition in the markets in order to encourage economic growth and help facilitate capital raising.
- Enhancing collaboration between the Ontario Securities Commission (OSC) and Financial Services Regulatory Authority of Ontario (FSRA) to achieve efficiencies including examining the potential of back-office efficiency opportunities.
- Introducing a single self-regulating organization (SRO) that covers all advisory firms, including investment dealers, mutual fund dealers, portfolio managers, exempt market dealers (EMDs) and scholarship plan dealers. In the short term the new SRO would regulate both investment and mutual fund dealers. In the long term this SRO would replace IIROC and MFDA and would also regulate exempt market dealers, portfolio managers and scholarship plan dealers and ultimately the OSC would delegate more registration responsibilities to the new SRO.
- Speed up the SEDAR+ project to create a more modern, centralized and user-friendly electronic filing/document retrieval system with the first phase to be complete in 2021. We’d love to see this happen in 2021 but again, don’t see this as being likely considering the heavy regulatory agenda this year.
Improving Regulations and Enhancing Investors Protection: Based on the Taskforce’s findings, capital markets participants are in favour of reducing regulatory burden and streamlining regulatory requirements. The Final Report recommends streamlining regulatory requirements and enhancing investor protection including:
- Lowering to 30 days the current four-month hold period for securities issued by a qualified reporting issuer using the accredited investor exemption and eliminating the hold requirement altogether after two years.
- Providing the Director of Corporate Finance at the OSC with power to impose terms and conditions on issuers similar to the power the Director of Compliance and Registrant Regulation has regarding registrants.
- Expanding civil liability for offering memorandum misrepresentation to extend to parties other than the issuer such as its board of directors, promoters, influential persons and experts.
- Allowing the OSC to adapt prospectus liability to address regulatory gaps resulting from new and evolving financing structures.
- For consistency with other jurisdictions, decreasing the ownership threshold for early-warning reporting disclosure from 10 to 5 per cent for non-passive investors.
- Designating a dispute resolution services organization that would have the power to issue binding decisions.
The Rise of Private Markets, Exempt Market Activities and Ensuring a Level Playing Field: The Taskforce included recommendations that aim to increase capital raising opportunities for small intermediaries and increase the variety and quality of independent products available to retail investors, such as:
- A dealer registration safe harbour for issuers that wish to distribute their own securities without an intermediary. We agree that this would be incredibly helpful to market participants.
- A finder category of registration which would impose fewer obligations compared to those imposed on EMDs or investment dealers (such as lower capital requirements) and eliminate the need for a finder to have an ultimate designated person or chief compliance office in certain instances. We also think this is a good idea, provided there’s clarity regarding when one crosses into being a registrable finder.
- The OSC and TMX to re-allow EMDs to act as “selling group members” in the distribution of securities made under a prospectus offering. This door was closed to EMDs a few years ago due to various policy concerns, so will be interesting to monitor this proposal.
- Additional accredited investor categories to include individuals that have passed relevant proficiency requirements.
- Improving access to the shelf system for independent product through guidance to address product shelf issues and the makeup of New Product Committees, title clarification for proprietary product to ensure a level playing field for all products gaining action to a distribution channel and that conflicts are addressed in the best interest of clients.
Fostering Innovation: The Taskforce made recommendations to help support stakeholders request for a more nimble and flexible regulator in order to foster innovation in the Ontario capital markets including:
- Foster an Ontario Regulatory Sandbox to benefit entrepreneurs and in the longer-term, consider developing a Canadian Super Sandbox where the OSC and FSRA should design an approach that would offer rapid exemptive relief or use other available regulatory tools to permit companies with innovative business models operating across the financial services sector in Ontario to test new financial services and products.
- Encourage access to retail investors in less liquid private equity and debt markets by introducing an appropriate retail investment fund structure (e.g. Interval Funds in the U.S.)
Other Recommendations: The summary above highlights only a handful of the Taskforce’s 70 plus recommendations. The Final Report also included other proposals such as:
- A fully electronic or digital delivery in relation to documents mandated under securities law requirements within six months.
- Name change of the Ontario Securities Commission to the Ontario Capital Markets Authority.
- Reducing the minimum consultation period for rule-making from 90 days to 60 days.
- Providing the OSC with additional tools for continuous disclosure and exemption compliance.
- Modernizing Ontario’s short selling regulatory regime to include protections allowed for in other jurisdictions (e.g., U.S. and U.K.)
- Introducing an exemption from the disclosure of conflicts of interest in connection with private
placements to institutional investors. An issue that’s been kicking around for years.
What’s Next? The next steps for the Final Report are now up to recently appointed Minister of Finance. The Minister may choose to act on some, none or all of the recommendations. As we have previously mentioned, we think that initiatives that can be implemented by Ontario authorities on their own could start moving forward 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 therefore likely to take much more time to achieve, if they are achievable at all.
AUM Law will continue to monitor the status of the recommendations and update you on significant developments. If you are interested in discussing any of the recommendations, please do not hesitate to contact Sandy Psarras, Chris von Boetticher or another member of our team.
January 29, 2021