On August 25, 2015, the participating provinces and territory in the Cooperative Capital Markets Regulatory System achieved an important milestone towards implementation of the system by publishing a revised consultation draft of the uniform provincial and territorial capital markets act (now known as the Capital Markets Act), along with the drafts of the initial regulations proposed for adoption by the participating provinces and territory under the draft uniform act. These materials have been published for a 120-day public comment period.

This article is part of Gowlings' Guide to the Proposed Initial Regulations and related materials. In this segment of our guide, we discuss the proposed initial regulations relating to the publication of research reports during distributions of an issuer’s securities. To view other sections of the guide, click here.

Overview

The participating provinces and territories are proposing to provide exemptions from the prospectus requirement under the draft uniform act to permit certain dealer communications relating to an issuer during a distribution of an issuer’s securities. These are set out in section 6 of CMRA Regulation 41-501 Prospectus Requirement and Exemptions and are based on Part 4 of OSC Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions. The adoption of the exemptions will represent a change in British Columbia.

Details

Under section 6 of CMRA Regulation 41-501:

Compilations and Industry Research ― A person falling within the category of “dealer-restricted person” may, despite the prospectus requirement, publish or disseminate any information, opinion or recommendation relating to the issuer of a “restricted security”, provided that it is:

Click here to view table.

For the definitions of “dealer-restricted person”, “restricted security” and “highly-liquid security”, see note (1) below.

Issuers of highly-liquid securities ― A dealer-restricted person may, despite the prospectus requirement, publish or disseminate any information, opinion or recommendation relating to the issuer of a restricted security that is a “highly-liquid security”, provided it is contained in a publication that is disseminated with reasonable regularity in the normal course of business of the dealer-restricted person.

For the definitions of “dealer-restricted person”, “restricted security” and “highly-liquid security”, see note (1) below.

Rationale behind Part 4 of OSC Rule 48-501

The prospectus exemptions under Part 4 of OSC Rule 48-501 are needed as advertising or marketing activities directly or indirectly in furtherance of a distribution of securities, including research reports, are subject to the prospectus requirement. Although the exemptions will be new for British Columbia, section 6 of CMRA Regulation 41-501 will minimize disruption for dealers in Ontario that have been relying on the exemptions when they distribute research reports about an issuer during a distribution of that issuer’s securities.

How does section 6 of CMRA Regulation 41-501 differ from OSC Rule 48-501?

Section 6 of CMRA Regulation 41-501 adopts Part 4 of OSC Rule 48-501, largely, in its current form as of March 2, 2015. There are no noteworthy changes that have been proposed.

Much of the balance of OSC Rule 48-501 (including, for example, trading restrictions imposed on dealers in the distribution of restricted securities) is now reflected in the Universal Market Integrity Rules of IIROC and is therefore not proposed to be carried forward.

What are the implications for British Columbia?

Liberalizing the research rules across the participating provinces and territories to allow research reports to be published during a distribution of restricted securities could serve useful to increase the information that is available to clients. However, the exemption will only permit research (other than relating to a highly-liquid security) in the form of compilation reports providing similar coverage in respect of a significant number of other issuers. As some commentators noted when OSC Rule 48-501 was published for comment, this could limit the content of the report to investors, making it difficult for dealers to respond to client inquiries and hindering the ability of the client to make an informed decision.