The Ontario Securities Commission (OSC) has released its Reducing Regulatory Burden in Ontario’s Capital Markets report (Report), identifying 107 initiatives to address 34 underlying concerns identified in the 199 suggestions received through its stakeholder consultation process to gather feedback on unnecessary burden and areas for improvement. While a national securities regulator would be the most significant reduction in the burden borne by participants in Canada’s capital markets, such a development is necessarily beyond the scope of the OSC’s initiative. For more information on progress towards establishing a national securities regulator, see our Blakes Bulletins on Canada’s Cooperative Capital Markets Regulatory System.
PURPOSE AND BACKGROUND
In November 2018, the OSC and the Ministry of Finance established a Burden Reduction Task Force to identify ways to enhance competitiveness for Ontario businesses by saving time and money for issuers, registrants, investors and other capital market participants, in support of the Government of Ontario’s Open for Business Plan. For more information on the OSC’s public consultation, see our January 2019 Blakes Bulletin: OSC Seeks Public Input on Reducing Regulatory Burdens for Market Participants.
The stated purposes of the Securities Act (Ontario) (OSA) are to: (a) provide protection to investors from unfair, improper or fraudulent practices; (b) foster fair and efficient capital markets and confidence in capital markets; and (c) contribute to the stability of the financial system and the reduction of systemic risk. Accordingly, while the initiatives outlined by the OSC are intended to make it easier for businesses to operate in Ontario capital markets by helping to minimize regulatory delays and reduce the cost of capital and free up resources to focus on growth, these benefits cannot come at the cost of compromising investor protection or market integrity.
The Report is clear that the OSC’s focus is on responding to stakeholder concerns, as opposed to cost savings alone. In identifying initiatives to bring forward in the Report, the OSC was guided by the fundamental principle of proportionate regulation found in the OSA which, among other things, provides that business and regulatory costs, as well as other restrictions on the business and investment activities of market participants should be proportionate to the significance of the regulatory objectives sought to be realized. Accordingly, the OSC’s review of existing securities laws and any proposed changes thereto is focused on ensuring that such regulation is balanced, tailored, flexible and responsive to different businesses and to the evolving marketplace.
The OSC’s initiative is in addition to, and overlaps with, the separate Canadian Securities Administrators’ (CSA) burden reduction initiatives. For more information on the CSA’s burden reduction initiatives, see our April 2018 Blakes Bulletin: CSA Announce Policy Projects to Reduce Regulatory Burden for Public Companies. Some of the changes the OSC is proposing in the Report are stated as being achievable within a relatively short time frame of about a year, either as falling entirely within the OSC’s purview or as already being pursued in coordination with the CSA. However, other changes will require legislative amendments, harmonization with other regulators, or long-term investments in technology, systems or expertise, and thus will be addressed over a longer time frame.
CONCERNS, DECISIONS AND RECOMMENDATIONS AFFECTING ALL MARKET PARTICIPANTS
The Report identifies 14 suggestions, 13 of which are addressed by decisions and recommendations of the OSC that have been completed or are in progress, while one suggestion will require further planning by the OSC.
One such recommendation is already in the process of being implemented as, on November 6, 2019, the Government of Ontario announced its intention to amend the OSA to allow the OSC to make exemptive relief orders applicable to multiple market participants (i.e., “blanket orders”).
As noted above, while a national securities regulator is necessarily beyond the scope of the OSC’s initiative, the Report does commit the OSC to reviewing compliance processes to increase reliance on the principal regulator, and evaluating whether to recommend relocating various provisions found in the OSA into National Instruments. For example, Ontario currently has its own definition of “accredited investor” in Section 73.3 of the OSA that is carved out of the definition used in all other provinces and territories of Canada, which is found in National Instrument 45-106 – Prospectus Exemptions). Similar to the harmonization of the take-over bid rules that was implemented in 2016, any harmonization changes would require the Ontario legislature to approve the recommended amendments to the OSA and so cannot be implemented unilaterally by the OSC.
Other recommendations affecting all market participants include:
- Adopting and publishing more service standards and establishing a framework for performance measurement and continuous improvement
- Enhancing regulatory impact analysis for rulemaking
- Improving clarity and consistency in drafting of rules, policies and guidance
- Engaging in consultations on how to better combine and balance principles-based rules, prescriptive rules and guidance, and to address stakeholders’ concerns that staff guidance is being applied as rules
- Redeveloping the OSC website and prioritizing the posting of updated consolidated rules (as is already done in British Columbia and Alberta, for example)
- Considering improvements to existing outreach programs (e.g., checklists, guides, in-person outreach, and channels of delivery) and reviewing the terms of engagement with advisory committees.
CONCERNS, DECISIONS AND RECOMMENDATIONS AFFECTING COMPANIES
The Report identifies 72 suggestions, reflecting 13 underlying concerns, of which seven are addressed by decisions and recommendations of the OSC that have been completed or are in progress, while six are not being pursued by the OSC at this time.
In connection with its CSA partners, the Report recommends that the OSC:
- Develop a process for issuers to request confidential staff review of an entire prospectus prior to announcing an offering, something that has been accommodated informally, on a one-off basis currently in connection with Jumpstart Our Business Startups Act (JOBS Act) filings in the U.S.
- Harmonize the requirements for “primary business” financial statements, which are currently a source of much consternation among issuers, particularly in connection with their initial public offerings
- Review options for simplifying filings of, and extending the filing deadline for, reports of exempt distributions
- Harmonize and amend the crowdfunding exemption for private placements
- Reduce the number of business acquisition report filings; for more information, see our September 2019 Blakes Bulletin: Raising the BAR: CSA Propose Rules to Increase Business Acquisition Report Triggers and Thresholds
- Avoid duplicative or unnecessary disclosure required in the Annual Information Form and Management Discussion and Analysis
- Develop a comprehensive approach to modernizing delivery requirements for issuer documents
- Develop and publish proposals to make it more cost-effective for issuers to conduct a prospectus offering
- Amend at-the-market offering rules so that frequently requested exemptive relief is not required; for more information, see our May 2019 Blakes Bulletin: CSA Propose Rules to Streamline “At-The-Market” Equity Offering Process for Canadian Issuers.
Other priorities identified in the Report include:
- Publishing prospective guidance about issues that OSC staff would raise during prospectus reviews or where there may be questions regarding the interpretation of certain requirements; and
- Providing clearer and more useable information on and within cease trade orders.
One recommendation in the Report that has already been implemented is for the OSC to develop a process for mining issuers to request confidential staff review of publicly filed mining disclosure prior to commencing an offering. For more information on the OSC’s implemented process, see OSC Staff Notice 43-706 Pre-filing Review of Mining Technical Disclosure.
Suggestions affecting companies which were identified in the Report, but are not currently being pursued include:
- Eliminating requirements for manual signatures and the sending of preliminary prospectuses
- Eliminating separate exemptive relief applications in the context of prospectus offerings
- Revisiting private placement exceptions beyond crowdfunding
- Streamlining management proxy circulars, including in respect of executive compensation
- Extending accommodations for venture issuers to other issuers (e.g., two years of financial statements in initial public offering prospectuses)
- Providing additional guidance or changes to the marketing rules beyond the “testing the waters” exemption
- Reducing and simplifying insider trade reporting, material change reporting for venture issuers
- Reducing regulatory overlap of Ontario securities laws and stock exchange rules
- Resolving misalignments between Canadian and U.S. rules applicable to offering under the multi-jurisdiction disclosure system
- Standardizing environmental, social and corporate governance reporting.
CONCERNS, DECISIONS AND RECOMMENDATIONS AFFECTING INVESTMENT FUNDS
The Report identifies 44 suggestions reflecting five underlying concerns regarding the prospectus regime, continuous disclosure, operational requirements, exemptive relief and stakeholder engagement for investment funds. There are 24 decisions and recommendations to address these concerns for investment funds including:
- Publishing a consultation paper to consider how to reduce the frequency of investment fund prospectus filings and implementing changes to reduce the frequency of prospectus filings
- Streamlining personal information form filing requirements
- Consolidating the simplified prospectus and the annual information form for mutual funds in continuous distribution and streamlining duplicative continuous disclosure content requirements (e.g., the management report of fund performance, related party disclosure requirements) and prospectus content requirements
- Identifying opportunities to promote electronic delivery of investment fund continuous disclosure documents and codifying exemptive relief granted in respect of notice and access
- Requiring each investment fund to have a designated website with the potential for investment fund regulatory disclosure to be posted
- Developing alternatives to the current alternative mutual funds (Alt Funds) proficiency requirements and alternative education programs and propose changes to the proficiency regime for Alt Funds
- Broadening pre-approval criteria for investment fund mergers and repealing regulatory approval requirements for a change of manager, a change of control of manager and a change of custodian that occurs in connection with a change of manager
- Codifying exemptive relief granted in respect of Fund Facts delivery applications and considering the circumstances in which a combination of Fund Facts is appropriate
- Revamping the Investment Funds Practitioner Newsletter with a new focus on providing practical information.
A few of the recommendations noted in the Report that have already been implemented are:
- Allowing an investment fund to have more than one custodian for additional operational flexibility without impacting the safety of assets
- Repurposing the Investment Funds Product Advisory Committee into the Investment Funds Technical Advisory Committee to provide greater focus on technical compliance challenges in the investment funds product regulatory regime
- The publication in June 2019 of revised approval to codify routinely granted relief to allow any body corporate that is an investment fund manager to act as the trustee of any pooled fund organized as a mutual fund trust in Ontario that it manages.
CONCERNS, DECISIONS AND RECOMMENDATIONS AFFECTING REGISTRANTS
The Report identifies 44 suggestions reflecting nine underlying concerns relating to registrant compliance requirements and obligations. There were 30 decisions and recommendations provided to address these concerns including:
- Establishing a moratorium on outside business activity (OBA) late fees, as well as reassessing OBA conflicts of interest and reporting obligations
- Reviewing and revising documents used to communicate compliance review findings to registrants, as well as enhancing communications with registrants throughout the compliance review process to increase transparency
- Improving coordination of compliance/desk reviews and other compliance related initiatives with other regulators, such as CSA and non-principal regulators (NPRs) and self-regulatory organizations (SROs)
- Developing and implementing a process for timely oversight of new rules and related compliance issues and a method to communicate related compliance review results in a clear and transparent manner to industry to enhance understanding and communication of compliance issues
- Review the Risk Assessment Questionnaire (RAQ) to determine if any questions can be removed based on information already received through other OSC filings, and enhancing the existing support tools to assist firms with completing the RAQ, including FAQs and continuing to have staff available to respond to questions
- Through OSC LaunchPad, evaluating what additional tools may be developed to assist fintech firms
- Permitting Ontario registrants in the appropriate circumstances to have a Chief Compliance Officer (CCO) who also is CCO for other unaffiliated registrants
- Evaluating options to reduce duplication in the registration and membership processes for Investment Industry Regulatory Organization of Canada (IIROC) member firms
- Evaluating options to reduce duplication in the review of notices required by sections 11.9 and 11.10 of National Instrument 31-103 for IIROC member firms
- Exempting international dealers, advisers and sub-advisers from registration under the Commodity Futures Act (Ontario) (CFA)
- Evaluating the triggers for an 11.9 or 11.10 notice under National Instrument 31-103 and improve processing of these notices.
CONCERNS, DECISIONS AND RECOMMENDATIONS AFFECTING MARKETS, TRADING AND CLEARING
The Report identifies 12 suggestions, reflecting three underlying concerns—entity oversight, specific rule requirements and approach to foreign entity regulation—of which eight are addressed by decisions and recommendations of the OSC that are in progress.
The decisions/recommendations of note include:
- Amending National Instrument 21-101 Marketplace Operation to remove burdensome and duplicative reporting requirements for marketplaces; and
- Reviewing the approach to foreign entity regulation and make recommendations.
CONCERNS, DECISIONS AND RECOMMENDATIONS AFFECTING DERIVATIVES PARTICIPANTS
The Report identifies 21 suggestions, reflecting seven underlying concerns, which are:
- Margin and collateral requirements for non-centrally cleared over-the-counter (OTC) derivatives
- The proposed business conduct rule for OTC derivatives dealers
- The proposed registration rule for OTC derivatives dealers
- The scope of the mandatory clearing obligation for certain OTC derivatives
- The OTC derivatives trade reporting rule
- OTC derivatives market fragmentation and inefficiencies
- Proficiency requirements when advising on recognized options.
The OSC identifies 18 decisions and recommendations to address the underlying concerns, most notably:
- Indefinitely delaying the implementation of a new rule imposing mandatory margin and collateral requirements on uncleared OTC derivatives
- In connection with the proposed business conduct rule, ensuring domestic and foreign OTC derivatives dealers remain active in providing liquidity to institutions hedging commercial risks associated with their businesses
- In connection with the proposed business conduct rule, expanding the availability and ease of use of exemptions for non-Canadian OTC derivatives dealers, advisers and sub-advisers
- Reviewing the existing registration regime for potential regulatory gaps to determine whether those gaps can be addressed my measures that are less burdensome than an OTC derivatives registration rule
- Reviewing the approach to foreign clearing agency and trading facility regulation (i.e., exemption from recognition) and make recommendations.