In our earlier article on the publication of the Report of the Crawford Panel on a Single Canadian Securities Regulator, we noted that Ontario had established the Crawford Panel as a precursor to the province’s formal announcement in May 2005 that it would not join the ‘passport system’ adopted by all other provinces and the territories.
The Canadian Securities Administrators (CSA) recently published a proposal for implementing what it describes as phase II of the passport system, although Ontario continues to be a non-participant.
The passport initiative dates back to fall 2004 when all Canadian provinces and territories, other than Ontario, signed a memorandum of understanding (MOU) on the implementation of a passport system.
In its Notice and Request for Comment, the CSA described phase I of the passport system. Phase I is embodied in Multilateral Instrument 11-101 Principal Regulator System, adopted effective September 2005. This provides relief for issuers and participants whose principal regulator is not Ontario from:
- the prospectus form and content requirements of any non-principal jurisdiction, coupled with the concurrent shortening of prospectus clearance time periods, under the mutual reliance review system (MRRS) for prospectuses in National Policy 43-201 Mutual Reliance Review System for Prospectuses and AIFs;
- most of the continuous disclosure requirements of any non-principal jurisdiction under National Instrument 51-102 Continuous Disclosure Obligations; and
- some of the requirements of any non-principal jurisdiction under the mutual reliance system for registration in National Policy 31-201 National Registration System and National Instrument 31-101 National Registration System (NRS).
The initiatives in phase II will build on and largely replace phase I and the MRRS. They will be implemented in early 2008.
Phase II will be embodied in National Instrument 11-102 Passport System (proposed NI 11-102) and related Form 11-102 F1 Notice of Principal Regulator and Registration in Additional Jurisdiction(s) and Companion Policy 11-102 CP Passport System.
Implementation of phase II depends on the adoption of two new proposed national instruments that have been published for comment, namely, NI 31-103 Registration Requirements (proposed NI 31-103) and NI 41-101 General Prospectus Requirements (proposed NI 41-101). Elsewhere in this issue of the Business Law Quarterly, we comment on proposed NI 31-103, and we commented on proposed NI 41-101 in a previous issue.
The CSA’s stated purpose for proposed NI 11-102 is to implement a system that gives a market participant access to the capital markets in multiple jurisdictions by dealing only with its principal regulator and meeting the requirements of one set of harmonized laws. A market participant’s principal regulator will usually be the regulator in the jurisdiction where the market participant’s head office or working office is located.
Proposed NI 11-102 will be implemented in stages. The parts that relate to continuous disclosure and prospectuses will be implemented when proposed NI 41-101 is implemented (currently targeted for the end of 2007). The part related to registration will be implemented concurrently with proposed NI 31-103 (currently targeted for mid-2008).
The advances of phase II over phase I are illustrated by the following:
Continuous disclosure – An issuer that reports in more than one jurisdiction will be exempted from any non-harmonized continuous disclosure requirements that remain in any jurisdiction, including its principal jurisdiction.
- Prospectus filings and clearance – The MRRS will be replaced with a new system under which a filer, upon obtaining a prospectus receipt from its principal regulator, can obtain an automatic prospectus receipt in each non-principal jurisdiction. This would eliminate the need to allow a period of time for non-principal regulators to decide whether to opt out of the MRRS process for a particular prospectus filing. The prospectus would be reviewed only by the principal regulator, but the filer would still be required to file its prospectus materials with its non-principal regulators and to pay prospectus fees in each jurisdiction, as it does now.
- Registration – The NRS will be replaced with a new system under which a firm or individual that is or becomes registered in its principal jurisdiction can obtain registration in a non-principal jurisdiction through a simple filing with its principal regulator. Any suspension, cancellation, termination, revocation or surrender of registration in the principal jurisdiction would result in a similar outcome in each non-principal jurisdiction. Again, registration fees would apply in each jurisdiction. In the case of registration, a need to comply with certain non-harmonized registration requirements of non-principal jurisdictions may continue to exist.
- Discretionary exemptions – The current need in the MRRS process for the principal regulator to co-ordinate with, and obtain decisions from, non-principal regulators will be eliminated as will be the need to file an application in non-principal jurisdictions and pay fees in those jurisdictions. The decision of the principal regulator will automatically apply in non-principal jurisdictions.
Market participants are currently required to pay fees in all jurisdictions for prospectus filings, continuous disclosure filings and registration. However, these will be reviewed by the participating jurisdictions to ensure consistency with the objectives of the MOU. For discretionary relief applications, market participants are required to pay fees only in their principal jurisdiction. The CSA also observed that phase II of the passport system will eliminate professional costs related to having to deal with multiple regulators and different laws.