Canada moves towards implementing the next phase of the Passport System to further simplify securities regulation, despite the OSC’s lack of participation.
In September, 2004, the provincial and territorial Ministers responsible for the regulation of securities in Canada, other than Ontario, agreed to a memorandum of understanding with the intent of providing market participants with a single window of access in a harmonized securities regulatory regime. To that end, Phase I of the Passport System was introduced with Multilateral Instrument 11-101 (MI 11-101), which came into force on September 19, 2005. Phase I of the Passport System was considered an interim step towards the greater harmonization and streamlining of securities regulations across Canada. The proposed Phase II of the Passport System builds upon the system’s foundations by, amongst other things, further harmonizing the regulation of prospectus reviews and processes for obtaining exemptive relief.
Key features of Phase II of the Passport System
The proposed National Instrument 11-102 Passport System (NI 11-102) and related policies would build on the steps taken in Phase I, while moving further towards the uniformity of requirements across jurisdictions. Further, each issuer would essentially be exempted from: non–harmonized continuous disclosure requirements, prospectus form and content requirements outside of its Principal Jurisdiction and registration requirements, through a general discretionary exemption system.
While the Ontario Securities Commission (OSC) has not signed onto the Passport System, Phase II has been designed for adoption by all Canadian securities regulatory authorities.
Proposed Interface Rules with the OSC
Despite Ontario’s reservations, the design of the Passport System allows for Ontario market participants to access Passport System jurisdictions. Further, National Policy 11-202 Process for prospectus review in multiple jurisdictions (NP 11-202) and National Policy 11- 203 Process for exemptive relief applications in multiple jurisdictions (NP 11-203) have been proposed to provide an interface between the OSC and the Passport System regulators. These proposals are designed to protect the efficiencies currently available under the Mutual Reliance Review System by allowing issuers to deal with only one regulator in most circumstances for prospectus review and exemptive relief applications.
Generally speaking, the proposed interfaces of NP 11-202 and NP 11-203 would work as follows:
Prospectus Review (NP 11-202)
- The market participant would file its prospectus with the Principal Regulator and with the non-principal regulator in each other jurisdiction in which it wishes to offer securities;
- If the OSC was the Principal Regulator, the filer would deal with the OSC, and the decision of the OSC would be the decision of all Passport System regulators. The receipt of the OSC would result in a deemed receipt from each jurisdiction in which the prospectus was filed;
- A market participant for which Ontario was not the Principal Regulator would deal with its Principal Regulator (under the Passport System), which would then coordinate its review with the OSC, and obtain the OSC’s comments. The receipt of the Principal Regulator would result in a deemed receipt from all Passport System regulators and, if the OSC cleared the prospectus, of the OSC.
Exemptive Relief Applications (NP-203)
- If the OSC was the Principal Regulator, the filer would pay fees to the OSC only, which would then deal with the application. The decision of the OSC would result in an automatic exemption in all Passport System jurisdictions;
- If the OSC was not the Principal Regulator, the filer would file the application and pay fees with its Principal Regulator and the OSC. The Principal Regulator would then coordinate its review with the OSC. The decision of the Principal Regulator would result in an automatic exemption in all other Passport System jurisdictions and would evidence the decision of the OSC, if the OSC agreed with the decision;
- If the application was outside the scope of NP 11-102, it would be dealt with as a “coordinated review application” and filings and fees would be submitted in each jurisdiction in which the exemption was required.
The proposed interface for registration, which has not yet been released for comment, is expected to work in much the same way as described above.
Implementation and transition
Phase I of the Passport System came into force on September 19, 2005. The CSA is targeting March 2008 for the implementation of all but the registration portion of the Passport System, with the registration portion planned for adopted in July, 2008.