Legal Updates

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Tuesday, June 7, 2016

On May 5, 2016, the Department of Finance Canada released for public comment a revised consultation draft (the “Revised Proposals”) of the Capital Markets Stability Act (the “CMSA”). The proposed CMSA is the federal component of the legislative foundation for implementation of the cooperative markets regulatory system (the “Cooperative System”), a joint initiative by the governments of Ontario, British Columbia, New Brunswick, Prince Edward Island, Saskatchewan, Yukon Territory and the federal government of Canada (collectively, the “Participating Jurisdictions”). The initiative seeks to establish a harmonized capital markets regulatory framework across Canada to, among other things, (i) increase protection for investors across Canada, (ii) foster more efficient, globally competitive capital markets in Canada, and (iii) strengthen Canada’s capacity to identify and manage capital markets-related systemic risks. The proposed CMSA addresses, among other matters, national data collection, systemic risk related to capital markets, and criminal enforcement. The Revised Proposals respond to public comments to the initial draft of the legislation that was published in September 2014.

The provincial-territorial component of the Cooperative System is the proposed uniform Capital Markets Act (the “CMA” and together with the CMSA, the “Acts”), which would replace, modernize and harmonize existing securities legislation in the Participating Jurisdictions. Initial drafts of both the CMA and CMSA were published for comment in September 2014. A revised consultation draft of the CMA and the draft initial regulations were published in August 2015, followed by the release by the Participating Jurisdictions in December 2015 of a summary of the proposed transition approach to be undertaken in moving from the current system to the Cooperative System.

Administration of the Acts will be delegated to a common regulator, the Capital Markets Regulatory Authority (the “Authority”), which is to be jointly created by the Participating Jurisdictions through the proposed Capital Markets Regulatory Authority Act (the “CMRAA”).

Opposition to the implementation of the Cooperative System from two major Canadian capital market jurisdictions, Alberta and Quebec, remains strong, with both provinces formally opposing it. On March 29, 2016, Alberta Finance Minister Joe Ceci formally announced that the Province of Alberta would not join the Cooperative System. In addition, the government of Quebec has challenged the constitutional validity of the Cooperative System, directing a reference to the Court of Appeal of Quebec in July 2015. Furthermore, thus far, Manitoba, Newfoundland, Nova Scotia, the Northwest Territories and Nunavut have yet to announce whether they will be joining the Cooperative System.

The Revised Proposals modify the original draft CMSA in the following manner:

1. Targeted Powers to Manage Systemic Risks Related to Capital Markets

The original draft of the CMSA included provisions for designating systematically important trading facilities, clearing houses, credit rating organizations, benchmarks and capital markets intermediaries. Once designated, the Authority would then have the power to regulate the foregoing entities. Stakeholders raised concerns that some of these designation provisions captured types of entities that might not be considered “systemically important” under current international guidance and that their potential designation would expose them to regulations that could hinder their competitiveness if similar regulations were not applied in other jurisdictions. In response to these concerns, the Revised Proposals eliminate all entity-level designation powers (except for those relating to trade repositories), and instead focus on various types of products designated by the Authority as systemically important and certain practices designated by the Authority as systemically risky.

Systemically Important Benchmarks

Under the Revised Proposals, the Authority may make an order designating a benchmark as systemically important if impairment to the benchmark’s reliability or a loss of public confidence in its integrity or credibility could pose a systemic risk related to capital markets. In satisfying this standard the Authority must look to factors such as the number and type of persons that rely on the benchmark, the availability of substitutes for the benchmark, and whether and how the benchmark is already regulated.

Systemically Important Products

Under the Revised Proposals, a class of securities or derivatives can be prescribed as systemically important if the trading in, the holding of positions in or the direct or indirect dealing with, securities or derivatives within the class could pose a systemic risk related to capital markets. Consideration will be given to factors such as (i) the total value of the securities or derivatives within the class, (ii) the volume and value of trading in a class, (iii) the number and type of persons that trade in, hold positions in or deal with the securities or derivatives within the class, (iv) the extent to which the trading in, holding of positions in or dealing with securities or derivatives within the class could transmit risks through capital markets or the financial system, and (v) whether and how the securities or derivatives within the class are already regulated.

Systemically Risky Practices

Under the Revised Proposals, a practice could be prescribed as systemically risky if the practice could pose a systemic risk related to capital markets. Consideration will be given to factors such as (i) the financial effect of engaging in the practice, (ii) the extent to which the practice could transmit risks through capital markets or the financial system, (iii) the type of persons that are engaging in the practice, and (iv) whether and how the practice is already regulated.

Urgent Orders

Much like the power to seek freeze orders under the provincial securities legislations, under the Revised Proposals, the Authority may make an urgent order if the order is necessary to address a serious and immediate systemic risk related to capital markets. Urgent orders may (i) prohibit or restrict a person from trading in a security or derivative, (ii) reduce the capital or financial resources employed in a practice, (iii) suspend or restrict trading in a security or derivative or class of securities or derivatives, and (iv) suspend or restrict trading on a trading facility. Urgent orders would take effect immediately or on a day specified in the order and would have effect for no longer than 15 days after the day on which it takes effect; provided, however, that orders would be able to be extended for a further period of up to 15 days.

2. Stronger Protections for Confidential Information Collected by the Authority for Systemic Risk Surveillance Purposes

Many stakeholders expressed concerns that the information collection and disclosure provisions under the original draft of the CMSA were too broad and that there were too many exceptions to the obligation for the Authority to keep information confidential. In response to these concerns, the Revised Proposals eliminate the ability of the Authority to disclose information if it considered that the public interest in disclosure outweighed the private interest in keeping the information confidential. In addition, the previously proposed power of the Authority under the original draft of the CMSA to change the confidentiality requirements through regulations has been eliminated. Despite these changes, the exceptions to the general confidentiality obligation of the Authority with respect to non-public information remain broad.

Stakeholders also expressed concerns that the original draft of the CMSA imposed additional reporting requirements that would add to their regulatory burden. The Revised Proposals provide that the Authority, if practicable, must first seek information from existing sources, including other regulators, before making a regulation or requesting the information directly from a market participant.

While the Revised Proposals are meant to address, among other concerns, criticisms regarding the broad powers provided to the Authority under the original draft of the CMSA, the requirement of the Authority to seek information from other sources, to the extent practicable, indicates that the Authority would still have broad discretionary powers under the Revised Proposals

3. Enhanced Procedural Provisions

The Revised Proposals replace an “opportunity to make representations” currently enjoyed under provincial securities legislation with an “opportunity to be heard”, whereby any person directly affected by an urgent order will have an opportunity to be heard as soon as feasible after the order is made if no such opportunity was afforded before making the order. The Revised Proposals also provide that any notices of violation for administrative monetary penalties may be contested directly before the tribunal established under the proposed CMRAA.

4. Strengthened Regulatory Coordination Between the Authority and Other Regulators

The Authority will be required to coordinate, to the extent practicable, its regulatory activities with those of other federal, provincial and foreign financial authorities so as to promote efficient capital markets, to achieve effective regulation and to avoid imposing an undue regulatory burden.

The Revised Proposals strengthen the obligation of the Authority to coordinate its activities with other regulators to complement the existing regulatory framework and address potential gaps in the regulations, while concurrently avoiding any undue regulatory burdens for market participants. The Revised Proposals are also intended to support stronger criminal enforcement in Canada’s capital markets, while ensuring that the Authority satisfies one of its stated mandates: to provide leadership and coordination in enforcing criminal law related to capital markets. Lastly, the Authority’s heightened obligation for coordination is linked to the desire to increase Canada’s international involvement in regulating capital markets, including developing policy and representing Canada in international forums related to such regulation.

Conclusion and Outlook

As noted on the Cooperative System’s website, if a province or territory chooses to operate outside the Cooperative System, it will have a constructive partner in the new Authority, with the ultimate goal of providing efficient access to capital markets. However, it remains to be seen what form, if any, the Cooperative System will take and how it will coexist with provinces and territories that oppose its implementation and/or choose not to join.

The implementation milestones set out in July 2015 in the most recent formulation of the Memorandum of Agreement regarding the Cooperative System (the “MOA”) among the Participating Jurisdictions, provided that by the summer of 2015, revised consultation drafts of the Acts would be published for public comment. While a revised consultation draft of the CMA was in fact published for comment in August 2015, the revised consultation draft of the CMSA was not released until now.  Although there have been delays in meeting targeted timelines, the release of the Revised Proposals demonstrates the federal Liberal majority government’s support of commitments made previously by the federal Conservative government.

Additionally, the MOA provides that the enactment of the CMA by each provincial and territorial Participating Jurisdiction and the enactment of the CMSA by the federal Parliament was to occur on or before June 30, 2016, and that the CMRA was to be operational in the fall of 2016. As the Revised Proposals are simply re-proposals and not actual legislation, it would appear that the implementation milestones have been abandoned.

Despite obvious delays in meeting targeted timelines, the formal opposition to the Cooperative System from Alberta and Quebec and the lack of commitment from the other provincial and territorial governments, the Participating Jurisdictions are forging ahead and seeking additional comments on the Revised Proposals by July 6, 2016. The Revised Proposals can be found on the Cooperative System website here. Comments may be submitted via the website of the Cooperative System here.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.