Today, 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.
While the revisions to the consultation drafts of the uniform act (published today) and the complementary federal Capital Markets Stability Act (still to come) are of importance as they establish the regulatory framework for the system, market participants and others will be particularly interested in understanding the proposed initial regulations, as they will have the most impact on their day-to-day business and operations.
Here are the top five things you need to know about the proposed initial regulations:
- the existing national and multilateral instruments (and related policies and forms) are being adopted and maintained, largely, in their current form;
- nine new regulations, and related policies and forms, and one new stand-alone policy are to be adopted to harmonize existing local requirements in the participating provinces and territories;
- there are noteworthy interim changes to the regulation of derivatives;
- there are several noteworthy regulatory changes in each of British Columbia and Ontario; and
- there are a few significant matters that have not been addressed yet and will be dealt with in future publications.
Consistent with earlier announcements, the proposed initial regulations substantially maintain the harmonization achieved so far under the current system of securities laws by adopting the national and multilateral instruments (and related policies and forms), largely, in their current form as of March 2, 2015. Generally, changes from the existing instruments have only been made if necessary to reflect the draft uniform act or to harmonize requirements in order to create a single set of regulations that will apply across all of the participating provinces and territories. For example, some so-called existing “false” carve-outs (i.e., carve-outs that accommodate differences in provincial or territorial legislation but do not result in substantively different requirements) have been removed, while others have been extended. The proposed changes are not intended to affect the instruments as they apply in the non-participating jurisdictions.
In addition to adopting the existing national instrument system, the proposed initial regulations include nine new regulations, and related policies and forms, and one new stand-alone policy, which are intended to apply only in the participating provinces and territories. For a list of these regulations, together with their related subject matter see Appendix A below. The regulations and policy have been developed to replace the existing local regulations, rules and blanket orders of the participating provinces and territories and to accommodate other regulatory requirements that have not been included in the draft uniform act but that are proposed to be retained.
Both securities and derivatives are proposed to be regulated under the draft uniform act. As a transitional measure, “derivatives” are proposed to be broadly classified into two categories: exchange contracts and over-the-counter (OTC) derivatives.
It is expected that when the draft uniform act is enacted and comes into force, the Ontario Commodity Futures Act will be repealed and that an “exchange contract” will include the commodity futures contracts and commodity futures options currently regulated under that act.
Two new regulations have been developed, primarily by adapting existing local derivatives rules in the participating provinces and territories, to provide a harmonized framework for the regulation of both exchange contracts and OTC derivatives. For a summary of key regulatory requirements proposed under the derivatives regulations see Appendix B below. The derivatives regulations are intended to serve only as interim rules pending the development of a comprehensive regime for the regulation of derivatives in the participating provinces and territories and will be updated to reflect the G-20 work underway by the Canadian Securities Administrators OTC Derivatives Committee.
Where necessary, changes have been proposed to other non-derivatives related regulations, forms and policies to reflect, and be consistent with, the proposed approach to derivatives in the participating provinces and territories (in particular, to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations).
To be clear, all derivatives in the participating provinces and territories will be subject to National Instrument 31-103. Derivative-specific categories of registration have not been proposed under the derivatives regulations. Instead, it is proposed that the categories of registration provided in National Instrument 31-103 would apply to derivatives.
The draft uniform act does not carry forward Ontario registration exemptions for financial institutions. In particular, the following exemptions will not be available under the draft uniform act as proposed: (i) the general registration exemption in subsection 35.1(1) of the Ontario Securities Act for specified financial institutions (which applies to those specified financial institutions in the business of trading OTC derivatives that are “securities”) for activities not prohibited under their governing legislation (e.g. the Bank Act); and (ii) the adviser registration exemption in paragraph 31(a) of the Ontario Commodity Futures Act for various financial institutions advising on commodity futures contracts and commodity futures options.
Certain contracts and instruments which fall within the definition of “derivative” under the draft uniform act but that are not regulated as derivatives today (for example, gaming or insurance contracts or contracts for purchase and sale of currency) are proposed to be excluded from prospectus, registration and trade reporting requirements, but would be subject to the market conduct provisions in the draft uniform act.
Some noteworthy changes, apart from those relating to derivatives, from current securities laws in British Columbia and Ontario are as follows:
Regulatory Changes in British Columbia
- The expanded definition of “investment fund manager” in the draft uniform act will require an investment fund manager operating outside the participating provinces and territories, if the fund it manages has a security holder resident in any participating province or territory, to be registered in the participating provinces and territories. This is closely aligned with the regulatory approach in Ontario, but is in contrast with the narrower interpretation of the investment fund manager registration requirement in British Columbia (which requires an investment fund manager to register in the jurisdiction only if it engages in the activities of a fund manager in the jurisdiction). Limited exemptions from the investment fund registration requirement for non-resident investment fund managers will be available if there has been no active solicitation in a participating province or territory by the non-resident investment fund manager (or the funds that it manages) after the launch date of the system or if all securities of the fund distributed in the participating provinces and territories are distributed under a prospectus exemption to “permitted clients”. The exemptions are based on Multilateral Instrument 32-102 Registration Exemptions for Non-Resident Investment Fund Managers.
- Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, adopted by Ontario and Québec, contains requirements for enhanced disclosure, independent valuations and majority of minority security holder approvals in connection with insider bids, issuer bids, business combinations and related party transactions, as applicable. This instrument is proposed to be extended into all of the participating provinces and territories and, as a result, will apply (subject to exemptions available in Multilateral Instrument 61-101) to all reporting issuers in British Columbia (that are not already subject to these requirements as a result of being listed on the TSX or TSXV).
Regulatory Changes in Ontario
- In order to distribute securities to persons outside of the participating provinces and territories, a Canadian issuer in a participating province or territory must either qualify the distribution under a prospectus or rely on a prospectus exemption under the proposed initial regulations. This is consistent with the British Columbia approach with respect to “distributions out”, but represents a change in Ontario from the current approach under OSC Interpretation Note 1 Distributions of Securities Outside Ontario. A prospectus exemption will be available for a distribution of securities made to a purchaser resident outside of the participating provinces and territories by an issuer located in a participating province or territory that has equity securities listed or quoted on a qualified market. A further prospectus exemption will be available for a distribution by an issuer located in a participating province or territory of non-convertible Eurobond debt securities to persons outside Canada where a genuine market exists outside Canada. Since this approach is new in Ontario, these corresponding exemptions will also be new and they are subject to a number of important conditions, including that the issuer file a report of exempt distribution (which will have the effect of the issuer being required to disclose non-Canadian purchasers).
- An investment dealer that trades in U.S. OTC markets will, with some exceptions, be required to comply with record keeping, data reporting and other requirements. These requirements are currently imposed as conditions of registration for investment dealers that have a British Columbia office and trade in U.S. OTC markets and will eventually apply to investment dealers that have an office in any participating province or territory (including in Ontario) and trade in U.S. OTC markets.
- Every jurisdiction but Ontario has adopted a harmonized rule which designates issuers that trade on U.S. OTC markets (or “OTC issuers”) with significant connections to the local jurisdiction to be reporting issuers in that jurisdiction and subject to Canadian continuous disclosure and other regulatory obligations. This rule is proposed to be extended into Ontario and, as a result, may cause OTC issuers who have a significant connection to Ontario to be deemed reporting issuers and subject to provisions of securities legislation that apply to a reporting issuer and its insiders.
The proposed initial regulations do not include any national instruments related to prospectus exemptions (i.e., National Instruments 45-102 and 45-106) or their related forms and companion policies. Proposals for prospectus exemptions in the participating provinces and territories will be made public at a later date, but are expected to constitute a comprehensive set of capital raising exemptions. This will include, along with exemptions that are already harmonized, newly harmonized exemptions such as:
- an exemption to allow capital raising from existing security holders;
- a family, friends and business associates exemption;
- two exemptions permitting equity crowdfunding, based generally on (i) exemptions adopted in British Columbia and other jurisdictions as of May 2015, and (ii) proposed Multilateral Instrument 45-108 Crowdfunding published for comment by Ontario and other jurisdictions in March 2014; and
- an offering memorandum exemption (with no offering size limit, but with investment limits).
The proposals for prospectus exemptions in the participating provinces and territories will also carry forward a number of harmonized exemptions that are based on local exemptions available today in one or more participating provinces or territories.
The memorandum of agreement formalizing the terms and conditions of the system provides that an interface mechanism will be negotiated with each non-participating jurisdiction such that the system is, effectively, of national application. Provisions relating to how interface will work are not included in the proposed initial regulations, but are expected to be made public at a later date.
The proposed initial regulations do not include a fee regulation. While it has been previously announced that the system will have a single, simplified fee structure designed to allow self-funding, it remains to be determined what approach or combination of approaches the funding model will adopt as the fee structures used by the participating provinces and territories today vary considerably.
Gowlings has in depth knowledge and background on the proposed initial regulations and is publishing a Guide to the Proposed Initial Regulations and related materials, covering matters relating to registration, prospectuses, disclosure and proxies, take-over bids and special transactions, securities transactions outside the system, civil liability and derivatives.
If you would like to discuss these regulations and how they may be relevant to your business, or if you wish to be added to our email distribution list for our Guide to the Proposed Initial Regulations and related publications, please contact any of the following lawyers:
- Kathleen M. Ritchie, Partner or Tal Cyngiser*, Associate, Toronto
- Guy David, Partner, Ottawa
- Bryce A. Kraeker, Partner, Waterloo Region
- Brett A. Kagetsu, Partner, Vancouver
*Tal Cyngiser was seconded to the Canadian Securities Transition Office (CSTO) for over a year, working extensively with the participating provinces and their securities commissions on the drafts of the initial regulations.
Appendix A: List of New CMRA Regulations and Policy
The proposed initial regulations include the following nine new regulations (and related policies and forms), and one new stand-alone policy, each of which are intended to apply only in the participating provinces and territories:
CMRA Regulation 11-501
contains requirements and guidance relating to definitions, procedure, civil liability and related matters
CMRA Regulation 21-501
contains requirements relating to certain capital markets participants
CMRA Regulation 31-501
contains requirements, exemptions and guidance relating to registration and related matters
CMRA Regulation 41-501
contains prospectus requirements and guidance
CMRA Regulation 51-501
contains requirements relating to issuer disclosure and proxies
CMRA Regulation 71-501
contains exemptions and related conditions, and guidance for international issuers and securities transactions outside the participating provinces and territories
CMRA Policy 71-601
contains guidance on the distribution of securities to persons outside the participating provinces and territories
CMRA Regulation 81-501
contains requirements for investment funds
CMRA Regulation 91-501
contains requirements and exemptions for exempt derivatives, exchange contracts, OTC derivatives and strip bonds
CMRA Regulation 91-502
contains rules for the designation of trade repositories, ongoing requirements for designated trade repositories and trade reporting requirements for counterparties to a derivatives transaction
Appendix B: Summary of Key Regulatory Requirements Proposed under the Derivatives Regulations
The following is a summary of key regulatory requirements proposed under the derivatives regulations:
(a) OTC Derivatives
Persons in the business of trading in or advising on OTC derivatives must:
- register as a dealer in the investment dealer registration category, exempt market dealer registration category or restricted dealer registration category;
- register as an adviser; or
- if applicable, rely on (i) a registration exemption that exists in National Instrument 31-103, or (ii) the registration exemption contained in CMRA Regulation 91-501 where each party to the trade is a permitted client or a qualified party, each acting as principal.
OTC derivatives are prescribed to be “securities” for purposes of the prospectus requirement in the draft uniform act, and consequently, an issuer of such product must:
- comply with the prospectus requirement; or
- if applicable, rely on (i) a prospectus exemption in National Instrument 45-106 proposed to be available for OTC derivatives, or (ii) the prospectus exemption contained in CMRA Regulation 91-501 where each party to the trade is a permitted client or a qualified party, each acting as principal.
OTC derivatives that are only securities because they are prescribed to be “securities” are not subject to other non-prospectus related requirements that are applicable only to securities.
Trade reporting is required, with some exceptions, under CMRA Regulation 91-502 for OTC derivatives.
(b) Exchange Contracts
Persons in the business of trading in or advising on exchange contracts must:
- register as a dealer in the investment dealer registration category or restricted dealer registration category;
- register as an adviser1; or
- if applicable, rely on (i) a registration exemption that exists in National Instrument 31-103, or (ii) the registration exemption contained in CMRA Regulation 91-501 for certain international dealers and advisers who trade in or advise on “non-Canadian exchange contracts”.
Exchange contracts are prescribed not to be “securities” for purposes of the definition of “security” in the draft uniform act and are therefore not subject to the prospectus requirement.
Before purchasing or selling an exchange contract for a client, or advising a client to purchase or sell an exchange contract, a registered dealer or adviser must deliver a risk disclosure statement to the client.
Trade reporting is generally not required under CMRA Regulation 91-502 for exchange contracts.
Market conduct provisions that are applicable to derivatives in the draft uniform act apply to exchange contracts.
1 It is proposed that advising representatives and associates advising representatives of a portfolio manager that provide advice regarding exchange contracts must have completed the courses presently required under the IIROC requirements relating to representatives trading in exchange contracts or have earned a CFA Charter.