On October 12, 2021, the Government of Ontario published a draft of its proposed Capital Markets Act (the CMA), an ambitious new piece of legislation that seeks both to restructure the Ontario Securities Commission (the OSC) and replace Ontario’s Securities Act and Commodity Futures Act. The draft CMA, published for stakeholder consultation, contains a number of recommendations and is intended to enhance OSC staff’s enforcement powers in an effort to modernize Ontario’s capital markets regulatory system.
Proposed legislative change in Ontario following the Taskforce’s Final Report
The Government’s release of the draft CMA comes in the wake of the recommendations put forward by the Ontario Capital Markets Modernization Taskforce (the Taskforce) in its January 22, 2021 final report [PDF] (the Final Report). Indeed, the first recommendation in the Final Report was the replacement of the Ontario Securities Act with the Cooperative Capital Markets Regulatory System (CCMR)-sponsored CMA. Osler previously reported on the Taskforce’s Final Report, providing our perspectives on its 74 wide-ranging recommendations.
While it was initially unclear what the impact of the Final Report would be, the Government of Ontario released its 2021 Budget [PDF] on March 24, 2021, where it announced its intention to implement certain Taskforce recommendations. Osler previously reported on the proposed changes to Ontario’s capital markets sector outlined in the 2021 Budget.
March 2021 also saw the introduction of the Securities Commission Act, 2021 (the SCA), which outlines the governance and accountability functions of the OSC. Also reflecting some of the Taskforce’s recommendations, the SCA would reconstitute the OSC as a regulatory authority, bifurcating its tribunal and regulatory functions. The legislation would also establish a Board of Directors to oversee the regulatory authority’s operations and regulatory activities. Additionally, the SCA would create separate Board Chair and Chief Executive Officer positions, as well as a specialized and distinct Capital Markets Tribunal, overseen by an appointed Chief Adjudicator. This model is reminiscent of that developed for Ontario’s Financial Services Regulatory Authority (which Osler previously reported on) and the proposed pan-Canadian and CCMR-sponsored securities regulatory initiatives before that. The SCA is expected to be proclaimed into force in 2022.
Overview of the CMA enforcement and related provisions reflecting the Taskforce’s recommendations
The draft CMA builds on and accommodates the governance and organizational revisions detailed in the SCA. The proposed CMA is divided into several parts. While some sections are generally consistent with existing provisions in the current Securities Act, others feature significant changes. One fundamental distinction from the Securities Act is the extent to which the CMA takes a “platform approach” to regulation. This approach sets out the fundamental provisions of capital markets law while leaving detailed requirements to be addressed in the rules, thus promoting regulatory flexibility and allowing the OSC to respond to market developments in a timely manner. The CMA also differs from the Securities Act with respect to its allocation of decision-making authority. Under the CMA, regulatory decision-making and decisions of the “Director” and “Executive Director” under the Securities Act have been assigned to the “Chief Regulator”.
As suggested above, several provisions included in the draft CMA mirror proposals initially advanced in the Taskforce’s Final Report. Many of them relate to investigation and enforcement under the Securities Act. Some of the relevant Taskforce recommendations reflected in the CMA are as follows:
- Recommendation 5: Ensure the securities regulatory framework and regulatory functions are reviewed periodically. To better ensure that the regulatory regime does not become outdated and misaligned with Ontario’s evolving marketplace, CMA s. 276 would require a periodic review of capital markets legislation and OSC rules every five years. A similar provision is included in the current Securities Act. Notwithstanding that, the Taskforce’s review represented the first comprehensive review in 17 years since the 2003 report [PDF] issued by the Crawford Committee.
- Recommendation 13: Provide OSC with additional tools for continuous disclosure and exemption compliance. Particularly with the rise of alternative forms of financing in the exempt market, there is an increased emphasis on the importance of full and continuous disclosure. CMA s. 125 would allow the Chief Regulator to make compliance orders to address specific issuer non-compliance situations quickly, including issues that relate to continuous disclosure requirements and adherence to the terms of the prospectus exemptions.
- Recommendation 30: Expand the civil liability for offering memorandum misrepresentation to extend to parties other than the issuer. In its Final Report, the Taskforce recognized that Ontario issuers had more limited exposure to misrepresentation claims than issuers in other Canadian jurisdictions. CMA s. 183 would address this by expanding civil liability recourse for investors in the exempt market by extending possible liability to issuers, directors of issuers, promoters of issuers, influential persons, experts and every person who signs prescribed disclosure documents.
- Recommendation 32: Give the regulator additional designation powers. Over the past several years, the presence and influence of new products have skyrocketed in capital markets. OSC staff has had to address new challenges with limited, somewhat blunt tools, such as traditional enforcement processes (as seen in the crypto asset trading platform initiative). CMA ss. 3 and 127 would provide the regulator with broader designation powers and rule-making authority in this developing area, including the power to designate crypto assets as securities and/or derivatives.
- Recommendation 57: Create a prohibition to [more] effectively deter and prosecute misleading or untrue statements about public companies and attempts to make such statements. Pointing to “short and distort” campaigns as an example, the Taskforce emphasized the need for more effective tools to address abusive practices designed to inappropriately manipulate the share prices of public companies. CMA s. 94 would allow the regulator to prescribe requirements and restrictions for persons engaging in promotional activities, which include communications that encourage or reasonably could be expected to encourage purchasing and trading securities and derivatives. It would also prohibit both false or misleading statements about public companies in connection with promotional activity as well as any attempts to make such statements.
- Recommendation 58: Increase the maximum for administrative monetary penalties to $5 million and increase the maximum fine for offences to $10 million. Supported by a questionable presumption that the current levels of penalties authorized act as an insufficient deterrent, CMA ss. 119(2), 171 and 174 elevate the quantum of administrative monetary penalties and fines for contraventions to $5 million and $10 million, respectively.
- Recommendation 59: Modernize investigative tools by empowering the provincial Court to issue capital markets production orders. In an effort to enhance quasi-criminal investigations, CMA ss. 154–62, 164, 166 and 169–71 would allow regulatory staff to obtain capital markets production orders. Instead of limiting OSC staff to physically seizing computers or servers, a production order could authorize staff to require firms and individuals that are not under investigation, but who have relevant information, to gather or prepare the information to deliver to an investigator. These new investigation powers also include related preservation powers.
- Recommendation 66: Create prohibitions to effectively prosecute those who facilitate contraventions of Ontario securities law. In an effort both to harmonize Ontario’s enforcement provisions with other CSA jurisdictions and modernize the OSC’s enforcement tools, proposed CMA ss. 114–15 would include new prohibitions against aiding, abetting or counselling a contravention of capital markets law and conspiring with any other person to contravene capital markets law.
- Recommendation 73: Provide for automatically reciprocating sanction orders, cease trade orders and settlements from other Canadian securities regulators and granting the regulator a streamlined power to make reciprocation orders in response to criminal Court, foreign regulator, SRO, and exchange orders. As discussed in the Final Report, Ontario is one of the few Canadian jurisdictions without automatic reciprocating sanctions orders. Proposed CMA ss. 116–18 would provide automatic and streamlined reciprocation provisions, which would support a consistent approach to the enforcement of orders and settlements across the country.
While Taskforce reports risk becoming an academic exercise, with many thoughtful, considered issues being put on a shelf for future consideration, the events of the past year show the Ontario Government’s desire to use the Taskforce’s Final Report as a springboard for change. From the new SCA, through the support shown in the province’s 2021 Budget, and to the release of the proposed draft CMA consultation draft, the Government of Ontario has shown a commitment to capital markets regulatory reform. The CMA seems to reflect a significant effort to modernize Ontario’s capital markets regulatory framework, including in the enforcement area. Nonetheless, it remains too early to gauge the response of market participants and investors to some or all of the proposed changes. The draft legislation is out for comment, originally until January 21, 2022, which has since been extended to February 18, 2022.