The Canadian government and the British Columbia, New Brunswick, Ontario, Prince Edward Island and Saskatchewan governments have signed a memorandum of agreement to formalize the terms and conditions of the new proposed cooperative capital markets regulatory system (Cooperative System). For more information on this, please see our September 2014 Blakes Bulletin: Cooperative Capital Markets Regulatory System Agreement and Draft Legislation Released.
A consultation draft of the uniform Provincial Capital Markets Act (PCMA) was released in September for public comment. Given the scope of the new proposed legislation at both the federal and provincial levels, Blakes is publishing a series of bulletins regarding various aspects of the proposed Cooperative System. This bulletin focuses on the elements of the PCMA dealing with registration and related activity.
The PCMA continues the trend to provide a broad platform of powers in the statute and to delegate the details to regulations to be enacted by the administrative regulator, as opposed to being specified in statutes passed by provincial legislatures. A number of key provisions relating to registrants currently in existing Securities Acts have not been included, such as provisions relating to registration of individuals, categories of registration, and exemption from registration requirements.
While the requirement to be registered is set out in the PCMA, none of the registration categories, conditions of registration, including proficiency, capital, insurance, compliance, and other ongoing business conduct requirements have been set out. They and all exemptions are left to the regulations. It is as yet unclear what differences there will be in requirements for dealers, advisers and investment fund managers as compared to the current regime.
The basic registration obligation continues in the PCMA, in that a person must not act as a dealer, adviser or investment fund manager unless registered in accordance with regulations. The business triggers for dealer and adviser registration continue to be “being engaged in the business of” trading in or advising with respect to securities.
The investment fund manager registration trigger would be new, comprising managing the business, operations or affairs of an investment fund from a location inside the province or from outside the province and “knows or reasonably ought to know that the investment fund has a security holder resident in the province.” This would have the effect of expanding Ontario’s current interpretation of registration requirements for non-resident investment fund managers to the other provinces under the PCMA.
BROADER SCOPE OF MARKET PARTICIPANTS AND COMPLIANCE REVIEWS
The definition of “market participant” would be significantly broadened under the PCMA. As with current legislation, market participants would be subject to reviews by the regulator and the tribunal under the PCMA could order that a market participant submit to a review of its practices and procedures and make prescribed changes. Among the new types of market participants under the PCMA would be: control persons of reporting issuers, persons engaged in investor relations activities on behalf of a reporting issuer or a security holder of a reporting issuer, a “designated entity” (which could include information processors or persons who provide investors or market participants with prescribed services), a person providing recordkeeping services to a registrant (which might cover, for example, Broadridge), and anyone distributing prospectus-exempt securities.
The compliance review powers would be expanded under the PCMA. Under current securities legislation, a securities commission may designate a person to review the books, records and documents required to be kept by a market participant. A person conducting such review may enter the business premises of a market participant and examine and make copies of such books, records and documents. Under the PCMA, a person conducting a review may require that a market participant provide any information, record “or thing” in the market participant’s possession or under its control. When on the business premises, the reviewer may also “examine anything in the place.”
The PCMA generally tracks the proposed amendments to the Securities Act (Ontario) relating to derivatives, including extending the registration requirements for persons or companies trading in derivatives, as well as prescribing classes of derivatives that are deemed to be securities, and prescribing requirements relating to derivatives, including disclosure and recordkeeping requirements. Most of these amendments are currently unproclaimed under the Securities Act (Ontario). We will be publishing another bulletin on the derivatives aspects of the Cooperative System.
TRANSITION AND REGULATIONS
Without the draft regulations supporting the PCMA having yet been made available for comment, it is unclear what significant changes in the regulation of registrants will be forthcoming.
In addition, although there are placeholders for transitional provisions, the current draft of the PCMA does not address important transitional issues, such as how existing registrants in one or more of the participating jurisdictions will become registrants under the new legislation, or how this will affect registrants registered in both a participating jurisdiction and a jurisdiction that does not adopt the PCMA.
Once further guidance is issued through details on transitional issues and the development of supporting regulations, we can have a better understanding of the impact of the PCMA on registrants going forward.
MATERIAL ORDER INFORMATION
The PCMA also introduces a number of new elements of particular relevance to registrants. Similar to but expanded beyond the prohibitions against insider trading or tipping by persons in a special relationship with an issuer, the PCMA introduces a new prohibition against persons who are “connected to an investor,” such as dealers and advisers, who know of “material order information” either purchasing or trading in a security that is the subject of that information or informing another person of that material order information unless it is necessary in the course of the person’s or investor’s business.
“Material order information” means information that relates to an unexecuted order or to the intention of an investor to purchase or trade a security, if the security’s market price would reasonably be expected to be affected by the execution of the order, the placement of an order to carry out the intention or the disclosure of any of the information.
A dealer or adviser would be considered to be “connected to the investor” if it engages in, is considering or evaluating whether to engage in, or proposes to engage in a trading or advising relationship with or on behalf of the investor or an insider, affiliate or associate of the investor.
Expanding the prohibition against tipping, the PCMA goes further by adding a prohibition against recommendations, where a person who is connected to an investor and who knows of material order information. In such situations, the connected person who knows of the material order information must not recommend or encourage another person to purchase or trade a security that is the subject of that information or to enter into a transaction involving a related financial instrument, i.e. even without conveying the material order information itself.
There would be the usual defences for material order information offences, similar to tipping defences, such as where a trade is pursuant to a written automatic plan or a legal obligation entered into before acquiring knowledge of the material order information, or if the person traded as agent. Similarly, there is an “information wall” defence for recommendations made by a person (who is not an individual), where no individual involved in making the recommendation had knowledge of the material order information nor was acting on the recommendation or encouragement of an individual who had that knowledge. This would allow for a defence where different departments or individuals within the same organization have access to different information.
NEW DEADLINE FOR COMMENT
Comments on the Consultation Drafts may be submitted until December 8, 2014 (recently extended from November 7 “as a result of requests from some stakeholders”). This remains an ambitious deadline for comments on these two significant pieces of legislation.