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Update

Wednesday, January 8, 2020

On November 19, 2019, the Ontario Securities Commission (“OSC”) released a report entitled Reducing Regulatory Burden in Ontario’s Capital Markets (the “Report”). The Report sets out 107 decisions and recommendations designed to reform Ontario’s securities regulatory regime by reducing the regulatory burden for participants in Ontario’s capital markets. The potential reforms affect all capital market participants, including public companies, investment funds, all securities registrants and derivatives participants.

Background

In November 2018, the OSC established a Burden Reduction Task Force to identify ways to increase competitiveness for Ontario businesses. As part of this initiative, the OSC consulted with stakeholders to gather feedback on unnecessary burden. Through the ongoing consultations the OSC received 69 comment letters and 199 suggestions on how to improve capital markets regulation. The OSC grouped those suggestions into 38 underlying concerns. The Report, in response to the feedback, addresses 34 of those underlying concerns through specific decisions and recommendations to address outdated rules and unnecessary duplication and complexity in Ontario’s capital markets regulation.

Of the 107 proposed reforms in the Report, almost 70 of them have a direct impact on investment funds and securities registrants. Additionally, the OSC gave special attention to reforms that will benefit small and medium-sized firms (public companies with a market capitalization of $100 million or less). Although the OSC is committed to implementing the reforms in the next six months to two years, many of the reforms require the OSC’s cooperation with the Canadian Securities Administrators (the “CSA”) due to Canada’s fragmented securities legislation. Therefore, the Report makes a distinction between “decisions” and “recommendations”. Decisions lie within the purview of OSC’s mandate, and recommendations require support of the Ontario Government and/or the CSA.

The OSC’s burden reduction efforts have been guided by a principle of “proportionate regulation”. In the Report, the OSC describes proportionate regulation as regulation that is balanced, tailored, flexible and responsive. The benefits of these potential reforms have been grouped into five major categories: reduced red tape; more tailored and flexible regulation; harmonization; more accessible information; and more timely and focused reviews. While such burden reduction efforts by the OSC are commendable, it must be noted that investigations and enforcement actions by the OSC were not considered by the Burden Reduction Task Force and therefore do not form part of the Report.

Market Participants

The Report addresses four specific concerns that cut across stakeholder groups and apply generally to all market participants. The concerns relate to:

  1. differences between the Securities Act (Ontario) (the “OSA”) and equivalent legislation in other jurisdictions;
  2. obtaining regulatory approvals and reviews;
  3. policymaking; and
  4. interaction with stakeholders.

There are 13 decisions and recommendations in the Report seeking to satisfy these concerns. These include:

  • recommending an amendment to the OSA to provide the OSC with the authority to make blanket exemptive relief orders applicable to multiple market participants to avoid the cost of filing multiple exemptive relief applications by such market participants;
  • reviewing compliance processes to improve focus on materiality, clarity, consistency and efficiency of interactions with OSC staff and increased reliance on the principal regulator;
  • working with the CSA to improve clarity and consistency in drafting CSA rules, policies and guidance; and
  • redeveloping the OSC website format and content, including prioritizing the posting of updated consolidated rules and providing better access to OSC staff contact information.

Public Companies

The Report identifies 13 specific concerns affecting public companies. The concerns relate to:

  1. prospectus reviews;
  2. reports of exempt distribution;
  3. cease-trade orders;
  4. exempt market capital raising;
  5. continuous disclosure documents;
  6. electronic delivery of documents;
  7. prospectus offering requirements;
  8. insider reporting and trading;
  9. venture issuer material change reports;
  10. overlapping exchange rules;
  11. insurance issuers;
  12. environmental, social and governance reporting; and
  13. the multijurisdictional disclosure system.

Some notable decisions and recommendations addressing these concerns are:

  • developing a process for issuers to request confidential staff review prior to filing a preliminary prospectus;
  • including additional information in published orders to better identify which securities are covered by a cease-trade order;
  • amend the disclosure required in the Annual Information Form and Management Discussion and Analysis to avoid duplicative or unnecessary disclosure;
  • developing a comprehensive approach to modernize delivery requirements of offering documents and continuous disclosure; and
  • developing and publishing proposals to make it more cost-effective for issuers to undertake public offerings.

Investment Funds

The Report identifies five specific concerns affecting Investment Funds. The concerns relate to:

  1. the prospectus regime for Investment Funds;
  2. continuous disclosure requirements for Investment Funds;
  3. operational requirements for Investment Funds;
  4. routine applications for exemptive relief; and
  5. engagement with Investment Fund stakeholders.

Some of the decisions and recommendations addressing these concerns in the Report include:

  • considering how to reduce frequency of Investment Fund prospectus filings;
  • finalizing amendments to National Instruments 81-101, 81-102, 81-106, 13-101 and 13-102 and National Policy 11-202 to consolidate the offering documents for mutual funds in continuous distribution;
  • developing and implementing amendments to streamline the material change reporting regime for Investment Funds;
  • finalizing amendments that require each Investment Fund to have a designated website with the potential for Investment Fund regulatory disclosure to be posted; and
  • make changes to the format and content of the Investment Funds Practitioner newsletter with a new focus on providing practical information.

Registrants

The Report identifies nine underlying concerns affecting registrants. The concerns relate to:

  1. registrant information requirements;
  2. compliance reviews;
  3. the Risk Assessment Questionnaire (“RAQ”);
  4. registration of fintech firms;
  5. Client Relationship Managers;
  6. Chief Compliance Officers (“CCO”);
  7. dual requirements and oversight for Self Regulatory Organization members;
  8. overlapping Ontario, federal and international requirements; and
  9. general registrant obligations.

Some highlights of the decisions and recommendations addressing these concerns in the Report include:

  • enhancing communications with registrants throughout the compliance review process to increase transparency;
  • reviewing the RAQ requirements to avoid duplication in information requests;
  • facilitating multiple CCO’s to be registered for a single legal entity where a business need is demonstrated;
  • evaluating options to reduce duplication in the registration and membership process for IIROC member firms;
  • working with the Federal and Provincial Governments to eliminate the requirement for registrants and exempt international firms to submit duplicative information to securities regulators.

Markets, Trading and Clearing

The Report identifies three underlying concerns affecting markets, trading and clearing. The concerns relate to:

  1. entity oversight;
  2. specific rule requirements; and
  3. approach to foreign entity regulation.

One of the decisions addressing these concerns in the Report is revising terms and conditions of exchange orders to remove burdensome and duplicative reporting requirements for exchanges.

Derivatives

The Report identifies seven underlying concerns affecting derivatives participants. The concerns relate to:

  1. margin and collateral requirements for non-centrally cleared OTC derivatives;
  2. the proposed business conduct rule;
  3. the proposed registration rule;
  4. the scope of the mandatory clearing obligation;
  5. requirements of the trade reporting rule;
  6. derivatives market fragmentation and inefficiencies; and
  7. proficiency requirements when advising on recognized options.

A couple of highlights from the decisions and recommendations addressing these concerns in the Report include:

  • leveraging the existing registration regime to eliminate duplicative obligations for dealers and advisers under the proposed registration rule; and
  • reducing the frequency of reporting required to demonstrate compliance.

Conclusion

The Ontario Government has provided an indication of support to the OSC’s proposed reforms. On November 6, 2019, through the introduction of Bill 138, the Ontario Government proposed to amend the OSA to allow the OSC to make blanket exemptive relief orders. Such support of the Provincial and perhaps Federal Governments is necessary to implement any meaningful burden reduction measures. Many of the reforms such as improving electronic records will also require significant capital contributions from the Provincial and Federal Governments.

If you have any questions with respect to the matters discussed above, please contact Ronald Schwass by email at rschwass@wildlaw.ca, Sarim Ali by email at sali@wildlaw.ca or any other member of Wildeboer Dellelce LLP.

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.