As reported in one of our earlier issues, the Canadian Securities Administrators (CSA) published for comment in March 2007 its proposed National Instrument 11-102 Passport System, a proposal for implementing what it described as phase II of the passport system. The initiatives in phase II were stated to build on and largely replace hase I and the Mutual Reciprocal Reliance System (MRRS) and were to be implemented in early 2008.

Phase I of the passport system was embodied in the Multilateral Instrument 11-101 Principal Regulator System, adopted effective September 2005 by the CSA members other than Ontario.

The passport initiative dates back to fall 2004 when all Canadian provinces and territories, except Ontario, signed a memorandum of understanding on the implementation of a passport system. The CSA’s stated purpose for proposed NI 11-102 was to implement a system that gives a market participant access to the capital markets in multiple jurisdictions by dealing only with its principal regulator (PR) and meeting the requirements of one set of harmonized laws. A market participant’s PR will usually be the regulator in the jurisdiction where the market participant’s head office or working office is located.

The CSA has now published for comment proposed National Policy 11-202 Process for Prospectus Reviews in Multiple Jurisdictions and proposed National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions. Proposed NP 11-202 and proposed NP 11-203, which supplement proposed NI 11-102, are intended to address how the passport system will work where an issuer or other person includes Ontario in a prospectus filing or exemption application. Ontario has indicated that it supports proposed NP 11-202 and proposed NP 11-203.

Proposed NP 11-202

Under proposed NP 11-202, a market participant filing a prospectus will file all the required documents with and pay fees to its PR and with each regulator (a non-principal regulator or NPR) in the other provinces or territories in which it wishes to offer securities. Ontario can be a PR under proposed NP 11-202.

If Ontario is the PR or if the document is simply not filed in Ontario, the prospectus is known as a passport prospectus. Only the PR will review the passport prospectus and related documents, communicate with the filer, and issue preliminary and final receipts. The issuance of the preliminary or final receipt will result in a deemed receipt by each of the other CSA members. Unlike the process under the current MRRS, under proposed NP 11-202, the NPRs will not review or provide any comments on the document.

If a province other than Ontario is the PR and the document has also been filed in Ontario, the prospectus is known as a dual prospectus. In this case, the PR will coordinate its review with the Ontario Securities Commission’s (OSC) review. In this circumstance, the filer will have to deal separately with two regulators.

Proposed NP 11-203

Under proposed NP 11-203, again, if Ontario is the PR or no relief is being sought in Ontario, the application is known as a passport application. Under the passport application process, an applicant will file its application materials with and pay fees only to the PR, and the PR will review the application, communicate with the filer and grant the exemptive relief decision. The issuance of the PR exemptive relief decision will result in an automatic exemption in each NPR jurisdiction.

If one of the other provinces is the PR and relief is being sought in Ontario, the application will be known as a dual application, which must be filed with — and for which fees must be paid to — both the PR and the OSC. Again, the PR will coordinate its review with the OSC.

The comment period for proposed NP 11-202 and proposed NP 11-203 was open until October 31, 2007. The CSA intends to publish NI 11-102 as a multilateral instrument together with NP 11-202 and NP 11-203 in early 2008. The CSA will also implement the prospectus, exemption applications and continuous disclosure aspects of those instruments concurrently with the adoption of proposed NI 41-101 General Prospectus Requirements.

The CSA will publish a similar policy for registration in the near future.

McCarthy Tétrault Notes:

In OSC Notice 11-904 Request for Comment Regarding the Proposed Passport System, published at the same time as proposed NI 11-102, the OSC had asserted that the passport proposal does not go far enough to modernize Canada’s securities regulatory structure, because it does not establish a single common securities regulator. Nonetheless, Ontario stated that it would continue to support the harmonization of regulatory requirements and would work with the other members of the CSA who became passport members to develop an effective interface mechanism between Ontario and the passport members.