On October 12, 2021, the Ontario government, as part of its Capital Markets Modernization Review, published a draft Capital Markets Act (CMA) and a Capital Markets Act Consultation Commentary (CMA Consultation Commentary). According to the CMA Consultation Commentary, the CMA sets out the regulatory framework for capital markets participants, outlines the Ontario Securities Commission’s (OSC) regulatory and enforcement powers, including the authority to make rules, and provides for the Capital Markets Tribunal’s (Tribunal) adjudicative powers.
The CMA draft follows on the publication of a draft Securities Commission Act, 2021 (SCA) that was published in March of 2021. The CMA and the SCA would replace the Securities Act and the Commodity Futures Act (CFA) in Ontario.
The SCA outlines the governance and accountability of the OSC, including the board of directors, Chief Executive Officer and Tribunal. The SCA implemented the following OSC governance changes recommended by the Taskforce:
- Separate the regulatory and adjudicative functions at the OSC; and
- Separate the current Chair and Chief Executive Officer position into two distinct positions
Modernizing Ontario’s capital markets through the introduction of the CMA and the SCA was a recommendation of the final report of the Capital Markets Modernization Taskforce (Taskforce), released in January 2021. An earlier version of the CMA was developed as part of the Cooperative Capital Markets Regulatory System (CCMR) initiative as an attempt to create a Canadian national securities regulatory regime.
- Platform Approach: A significant difference is the extent to which the CMA adopts a platform approach to capital markets regulation, in that the CMA is designed to set out the fundamental provisions of capital markets law while leaving detailed requirements to be addressed in the rules. This approach was developed in the context of the CCMR initiative and has been continued in the CMA.
- Decision Making: 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.
- Order Making: Under the Securities Act, the OSC’s Board of Directors is responsible for recognition and designation orders and certain cease trade orders. Under the CMA, the Chief Regulator has been assigned responsibility for recognition and designation orders under the CMA and will have authority to make cease trade orders in extraordinary circumstances, subject to confirmation by the OSC’s Board of Directors.
- Commodity Futures Act: In Ontario, commodity futures contracts and commodity futures options are regulated under the CFA. It is proposed that, if the CMA is enacted, the CFA would be repealed, and commodity futures contracts and commodity futures options currently regulated under the CFA would be regulated as derivatives under the CMA. The registration exemptions under the CFA that apply to commodity futures contracts and commodity futures options would no longer be available. The “trade trigger” for registration under the CFA would be replaced with the CMA’s “business trigger”. Therefore, market participants who previously relied on exemptions under the CFA for trading in exchange contracts would be subject to the dealer registration requirement under the CMA only if they are in the business of trading. Furthermore, market participants currently relying on CFA exemptions may be able to rely on registration exemptions in NI 31-103 that apply to exchange contracts.
- Registration Requirements: Unlike in the Securities Act, the CMA allows the OSC to make a rule imposing registration requirements on over-the-counter (OTC) derivatives dealers and derivatives advisers not otherwise subject to registration exemptions in the CMA.
- Rule Making: The CMA provides for approach to rule-making contrasts to the more prescriptive approach currently used in the Securities Act, which contains an itemized list of each and every head of rule-making that requires amendment whenever it is necessary to make a rule not covered in the list. manner. Instead of the detailed list of heads of rule-making authority, substantive provisions would be included throughout the CMA. These additional substantive provisions would support the general rule-making authority contained in the legislation.
Taskforce Recommendations Included in the Capital Markets Act
According to the Consultation Document, the Government of Ontario is utilizing the CMA as a legislative vehicle to implement a number of Taskforce recommendations, several of which are described below. The CMA includes a provision requiring a periodic review every five years of the capital markets legislation and OSC rules.
1. The CMA allows the Chief Regulator to make compliance orders to address specific situations where an issuer is non-compliant with requirements. The compliance order power could be delegated to the staff of the OSC’s Corporate Finance Branch.
2. The CMA includes the rule-making authority to allow for the automatic issuance of prospectus receipts for issuers that meet certain requirements (well-known seasoned issuer model) including that the issuers have a certain public float or have issued debt securities above a set amount in a specified time period and have established an appropriate disclosure record.
3. The CMA includes broader civil liability recourse for investors in the exempt market by expanding the rights of action for misrepresentations in an offering memorandum to the issuer, as well as directors and promoters of the issuer.
4. The CMA would provide the OSC with designation powers and rule-making authority for crypto assets that are not already securities or derivatives would allow the OSC to tailor requirements to new platforms and assets.
5. The CMA would require all publicly listed issuers to have an annual advisory shareholders’ vote on the board’s approach to executive compensation.
6. The CMA includes the rule-making authority to allow for requirements to be placed on independent directors of issuers in the context of material conflict of interest transactions Including mandating the formation of independent committees to oversee material conflict of interest transactions. Transactions include insider bids, business combinations in which insiders are eliminating public shareholders, and significant related-party transactions with the issuer that could result in the transfer of value from minority shareholders to insiders.
7. The CMA includes new Tribunal order powers related to M&A matters that may be exercised by the Tribunal upon an application by an interested person. Providing the Tribunal with these powers would provide market participants with an alternative to initiating a court proceeding for these remedies.
8. The CMA provides that the OSC may prescribe requirements and restrictions for persons engaging in promotional activities, which are defined to include communications that encourage or reasonably could be expected to encourage purchasing and trading securities and derivatives. It also specifically prohibits false or misleading statements about public companies in connection with promotional activity and attempts to make such statements.
9. The CMA increases the maximum administrative monetary penalties that can be imposed by the Tribunal and the maximum fine for offences that can be imposed by the court.
10. The Provincial Offences Act search warrant power only provides a power to search for “things” such as paper records and objects..
11. The CMA modernizes quasi-criminal investigations by allowing the OSC to apply to a judge or justice of the provincial court (justice) to obtain a production order. Production orders would require firms and individuals that are not under investigation, and who have possession or control of the relevant information or data, to gather or prepare the applicable documents, records, or electronic data to deliver to an investigator. A production order may require the record holder to gather or prepare the records, even if they are in off-site paper or stored electronically, and provide them to an investigator, within a certain period of time specified by the justice.
12. The CMA includes changes that modernize the OSC’s enforcement powers including removing the personal service requirement and giving the OSC the rule-making authority to set the service requirements that would include electronic service. They also include a new power for the OSC to obtain a warrant to search a dwelling-house during daylight hours.
13. The CMA allows an authorized investigator to compel a summons recipient to preserve evidence for the purpose of an investigation. This power allows the OSC to enforce non-compliance with a request or demand to preserve evidence and help to ensure that evidence is not destroyed or altered in response to an OSC summons. This power would increase the effectiveness of OSC investigations and aligns with similar investigation tools in other provinces.
14. The CMA includes a provision that allows the OSC and respondents to mutually agree to extend the limitation period to commence proceedings.
15. Similar to section 154 of the Securities Act, the CMA includes a provision that clarifies that there is no contractual liability for disclosures to the OSC of information to comply with capital markets law. As such, if a person provides information to the OSC pursuant to a summons, this provision clarifies that this person is not subject to contractual liability for complying with the summons.
16. The CMA prohibits aiding, abetting or counselling a contravention of capital markets law and conspiring with any other person to contravene capital markets law. These prohibitions would allow the OSC to take enforcement action against those who facilitate or assist in contravening capital markets law and provide the OSC with additional tools to enforce capital markets law and improve investor protection. Other CSA jurisdictions have similar prohibitions in their securities acts.
17. The CMA includes a prohibition against front-running: acting on knowledge of an order of a client or connected investor that would disadvantage the client or connected investor. The relevant defences, partially based on IIROC’s Universal Market Integrity Rules, are also included and additional criteria for the defences may be prescribed in the rules.
18. The CMA does not include a provision equivalent to section 16 of the Securities Act requiring confidentiality of any information obtained pursuant to a summons, including information about the OSC’s investigations. Instead of a broad prohibition against disclosing any information related to a summons, the CMA takes a different approach and provides that the Chief Regulator may make orders with respect to the confidentiality of investigations. This approach gives flexibility to the OSC when imposing confidentiality obligations with respect to investigations.
19. The CMA includes a provision that reflects that the OSC may not require production of privileged documents. Under common law, respondents always have the right to not produce privileged documents, and the Supreme Court of Canada has made this a quasi-constitutional right.
20. The CMA includes provisions allowing the Tribunal to make disgorgement orders and allowing the Chief Regulator to apply to the court to appoint one or more persons to administer and distribute the disgorged amounts received by the OSC.
21. The CMA includes automatic and streamlined reciprocation provisions similar to provisions that have already been enacted in most CSA jurisdictions other than Ontario.
22. The CMA includes a statutory protection against the OSC disclosing information that would identify a whistle-blower. Currently, the OSC would rely on the disclosure exemptions in the Freedom of Information and Protection of Privacy Act (FIPPA) to withhold this information.
The CMA Consultation Commentary cautions that the draft CMA is only intended for stakeholder consultation purposes at this stage, and comments received during the consultation will be considered prior to determining next steps.
For more information, please call Barbara Hendrickson at BAX Securities Law (647) 403-4606.
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