Securities reform heats up

Jim Middlemiss

Canadian securities lawyers were busy during the holiday season responding to the federal government’s draft regulations for the co-operative capital markets regulatory system, which was released in late August with a 120-day comment period.

More than 25 of the country’s top securities lawyers pored over the draft and provided comments in the Canadian Bar Association’s official response, notes Barbara Hendrickson co-chairwoman of the CBA securities committee, which spearheaded the effort, along with representatives from the Canadian Corporate Counsel Association.

“There is a lot of interest in this across Canada,” noted Hendrickson, founder of BAX Securities Law in Toronto.

She said at this stage, “in my view, it’s mostly a clean up and harmonization. There were things in here that people were looking to change for a while.”

The co-operative capital markets regulatory system is the federal government’s politically sensitive move to create a national securities regime, following the Supreme Court of Canada’s ruling in Reference re Securities Act, 2011.

That case held the federal government’s then-proposed law — the Canadian Securities Act — didn’t pass muster under the Constitution’s federal trade and commerce provision because it infringed on provincial powers.

The Supreme Court, however, left the door open, suggesting that a “cooperative approach that permits a scheme recognizing the essentially provincial nature of securities regulation while allowing Parliament to deal with genuinely national concerns remains available and is supported by Canadian constitutional principles and by the practice adopted by the federal and provincial governments in other fields of activities.”

Now, B.C., New Brunswick, Ontario, Prince Edward Island, Saskatchewan, and the Yukon have entered into a memorandum of understanding to create a uniform “capital markets act” and operate a single independent “capital markets regulatory authority.” A proposed “capital markets stability act” is also in the works, though it wasn’t included as part of the August comment package.

Noticeably absent from the initiative are Alberta and Quebec, both of which opposed the federal government’s initial effort. Quebec is again resorting to a court challenge of the proposed new regime.

As is the case with securities law reforms, the CBA response was very technical and specific in nature, responding to a wide range of questions posed by the CRMA. It touched on everything from the definitions section of the act to disclosure, proxies and derivatives.

That’s no surprise as the CRMA is essentially crunching six securities acts into one and creating accompanying policies and regulations.

One area of concern raised by the CBA involved discretion of the regulator to issue a receipt for a prospectus. “We generally support consolidation of such sections,” the CBA report noted, however “we urge caution with the discretion provided the chief regulator.”

The lawyers also welcomed importing an Ontario rule restricting use of prospectus exemptions involving restricted shares without approval of minority shareholders. However, the CBA noted that “because this will be a substantive change for unlisted reporting issuers in CMR jurisdictions other than Ontario, we suggest that fact be stated explicitly in a future CCMR publication.”

The group is also calling for more clarity on what constitutes an “indirect distribution” of a security, noting that proposed CMRA policy 71-601 “presents a departure from the current Ontario practice for non-reporting issuers. The scope of the concept of ‘indirect distribution’ is broad. It could potentially include almost any initial issuance and subsequent resale of a security that may end up being traded in Ontario. In our view it would be useful to provide more guidance on the concept of ‘indirect distribution’ through commentary and examples.”

The CBA report also cautioned the CMRA about access to derivative markets. “While at this stage we support the approach under the CMA to adopt the provincial securities derivatives regime, securities regulators should continue to work closely with foreign regulators to adopt harmonized rules to provide Canadian market participants with continued access to international markets.”

Hendrickson said Canada has been talking about creating a national securities regime since the 1960s and this is simply a step towards that. “Any harmonization is good.”

However, she said the real challenge lies ahead in figuring out how the pieces of the puzzle fit together between CCMRS jurisdictions and non-CCMRS jurisdictions. “How is this going to work with provinces that are not participating?” she asks.

That’s the next round. The CMRA notes in its August proposal that neither its draft act nor its regulations “establish an interface with non-participating jurisdictions. We expect that an interface will be agreed upon with non-participating jurisdictions.”

As well, participating jurisdictions will be issuing for comment a “harmonized set of prospectus exemptions that strike an appropriate balance between access to capital and investor protections.”

Hendrickson says the big question is “how far are they going to extend their reach? That impacts how they are going to interact.”

“They are going to come out with something on that this year. All we can do is wait. There is no use speculating.”

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