a hand holding a guitar

Insights

ARTICLE

Ontario capital markets modernization taskforce releases initial consultation report

On July 9, 2020, the Ontario Capital Markets Modernization Taskforce (the Taskforce) released its initial consultation report (the Report). The Taskforce, first announced in Ontario’s 2019 Fall Economic Statement, was established to review and make recommendations to modernize Ontario’s capital markets regulation. Following industry stakeholder consultations, the Taskforce outlined its findings in the Report, which includes more than 47 policy proposals.

The Taskforce is seeking additional feedback from stakeholders in response to the proposals outlined in the Report. Submissions should be sent to CMM.Taskforce@ontario.ca by Sept. 7, 2020. The additional feedback will inform the Taskforce’s final report to the Minister of Finance, which will be completed by the end of 2020.

The following outlines the Report’s key recommendations.

Capital raising

Mandate that securities issued by a reporting issuer using the accredited investor prospectus exemption be subject to only a seasoning period

  • Securities distributed by an issuer under certain prospectus exemptions, such as the accredited investor exemption, are currently subject to a four-month restricted period before becoming freely tradable.
  • Taskforce recommendation: Securities issued by a reporting issuer using the accredited investor exemption should be subject to only a seasoning period, whereby secondary trades are permitted so long as the issuer has been a reporting issuer for four months preceding the trade. The Taskforce believes this would invigorate the secondary market and provide issuers with additional capital raising opportunities. The Taskforce is seeking input as to, among other things, whether this proposal would impact the willingness of issuers to do prospectus offerings.

Introduce an alternate offering model for reporting issuers

  • The Taskforce noted that the high costs associated with preparing and filing a prospectus can be a barrier to capital raising for smaller issuers.
  • Taskforce recommendation: Introduce an alternative offering model prospectus exemption for reporting issuers that have securities listed on an exchange and are in full compliance with their continuous disclosure requirements. The exemption would require that the issuer be a reporting issuer for 12 months, be up to date with its continuous disclosure and would be subject to an annual maximum. To use the exemption, the issuer would file a short disclosure document with the Ontario Securities Commission (the OSC) to update its continuous disclosure record and certify its accuracy. Investors would not receive the protections against misrepresentation that would apply to a prospectus offering, but would have available the remedies associated with purchases in the secondary market.

Introduce greater flexibility to gauge interest from institutional investors prior to filing a preliminary prospectus

  • Stakeholders noted that publicly-listed companies are increasingly relying on financing through private placements rather than prospectus offerings, in part due to the limited ability to “test the waters” prior to a prospectus offering.
  • Taskforce recommendation: Liberalize the ability for reporting issuers to pre-market transactions to institutional accredited investors prior to filing a preliminary prospectus, accompanied by increased monitoring and compliance examinations by regulators of the trading for those with advance information. The Taskforce believes that a greater ability to communicate with potential investors to gauge demand would minimize the risk of failed transactions.

Allow exempt market dealers to participate in prospectus offerings and be sponsors of reverse-takeover transactions

  • Exempt market dealers (EMDs) are currently unable to participate as selling group members in respect of prospectus qualified securities. In addition, the TSX Venture Exchange’s (TSXV) policy for Capital Pool Company (CPC) offerings creates a barrier to EMDs acting as agents, because TSXV’s CPC policy requires at least one agent in a CPC offering to be a member of the Investment Industry Regulatory Organization of Canada (IIROC).
  • Taskforce recommendation: OSC and TMX should allow EMDs to act as “selling group members” in the distribution of securities under a prospectus offering, which would include CPC offerings. The Taskforce also proposes that the OSC work with stock exchanges to allow EMDs to act as sponsors in reverse-takeover transactions.

Develop a well-known seasoned issuer model

  • In the U.S., a well-known seasoned issuer (WKSI) model is used, whereby issuers that are above a certain public float or that have issued debt securities above a set amount in a specified time period and have established an appropriate disclosure record, can register their securities offerings on shelf registration statements that become effective automatically upon filing.
  • Taskforce recommendation: Amend the Securities Act (Ontario) (the Act) to allow the OSC to develop a WKSI model to issue shelf prospectus receipts automatically for WKSIs, streamlining the shelf prospectus process for large issuers that meet the prescribed thresholds and making it more cost-efficient for such issuers to raise capital.

Introduce additional accredited investor categories

  • Although the criteria for an “accredited investor” may be indicative of one’s ability to withstand potential market losses, stakeholders noted that the current criteria may not necessarily be correlated with one’s sophistication or ability to understand investments.
  • Taskforce recommendation: Expand the accredited investor definition to include individuals who have completed relevant proficiency requirements, such as the Canadian Securities Course Exam, the Exempt Market Products Exam or the CFA Charter, in order to create greater investment opportunities for these individuals, even though they may not otherwise qualify as accredited investors.

Prohibit registrants from benefiting from tying or bundling capital market and commercial lending services

  • Smaller and independent investment dealers have raised the issue of intermediaries engaging in practices which may impede competition, such as arrangements where a commercial lender requires clients to retain the services of an affiliate investment dealer for their capital raising and advisory needs, as a condition for preferential rates on commercial lending transactions.
  • Taskforce recommendation: Amend the Act to extend the provisions of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to prohibit registrants, as a consequence of an exclusivity arrangement, from providing capital markets services under certain circumstances.

    The proposal would also require a senior officer of a specified firm registrant to attest that no such prohibited conduct has occurred each time the registrant provides such capital markets services to a reporting issuer with whom it had a commercial banking relationship. Such a registrant would also be considered “connected” to the issuer, such that an independent underwriter would also be required under National Instrument 33-105.

    The Taskforce asks for input on whether a specific percentage of all underwriting arrangements should be mandated to be comprised of non-bank owned investment dealers, or whether there should be a blanket prohibition against any registrant providing capital market advisory or underwriting services to an issuer receiving commercial lending services from an affiliated financial institution.

Allow greater access to capital for start-ups and entrepreneurs by angel investor “groups” for accredited investors

  • Angel investor “groups” or “networks” may be characterized as “investment clubs” for accredited investors. Generally they seek to invest in a diversified portfolio of start-up businesses, where smaller investments are made by many investors across many issuers, helping to diversify the risk. Certain angel groups may be structured to earn a fee from working with their members and may, in certain circumstances, trigger registration under securities legislation.
  • Taskforce recommendation: Change current registration requirements to enable angel groups to operate, and thereby encourage investments in early stage issuers. The Taskforce seeks feedback on how this goal can be achieved.

Prohibit short selling in connection with prospectus offerings and private placements

  • The Taskforce noted that the current regulatory regime does not effectively preclude short sales by certain investors in advance of their participation in a public offering or private placement. As a result, the pricing and execution of new offerings is often impacted. In the United States, the Securities and Exchange Commission has addressed some of these concerns through the prohibition in Rule 105 of Regulation M: Short selling in connection with a public offering.
  • Taskforce recommendation: The OSC consider adopting a rule that would prohibit market participants and investors that have previously sold short securities of the same type as offered under a prospectus or private placement from acquiring securities under the prospectus or private placements.

Continuous disclosure

Provide the option of filing semi-annual financial reporting

  • Many stakeholders, especially smaller issuers, expressed concerns relating to the significant costs and resources required to produce quarterly financial statements and management discussion and analysis (MD&A).
  • Taskforce recommendation: The Taskforce acknowledges that while quarterly financial statements provide timely information, there can be instances where regulatory and internal costs of preparing such reports exceeds the benefit. The Taskforce is considering changing the requirement for quarterly financial statements to allow for an option for issuers to file semi-annual reporting, and is asking for input on this including whether, if allowed, it should be restricted to smaller issuers.

Adopt full use of access equals delivery model of dissemination of information in the capital markets and digitization of the capital markets

  • Taskforce recommendation: Establish an access equals delivery model and full use of electronic delivery of documents prospectuses, annual and interim financial statements and related MD&A, and management reports of fund performance (MRFP) for investment funds.

Consolidate reporting and regulatory requirements

  • Stakeholders expressed concerns relating to outdated and duplicative public information repeated in multiple disclosure documents that investors must absorb, leading to concerns relating to information overload.
  • Taskforce recommendation: Streamline the reporting and regulatory requirements, including:
    • combine the form requirements for the annual information form (AIF), MD&A and financial statements; and
    • simplify the content of the business acquisition report (BAR), or revise the significance tests so that BAR requirements apply to fewer significant acquisitions. (Please note that, on August 20, 2020, the Canadian Securities Administrators announced that the significance tests were being relaxed so that the BAR requirements would in fact apply to fewer transactions.)

Governance

Improve corporate board diversity

  • Since 2014, TSX-listed companies have been required to provide disclosure regarding their approaches to gender diversity, including data regarding the representation of women on boards of directors and in executive officer positions. This “comply or explain” model does not require TSX-listed companies to adopt gender diversity policies and practices, such as targets.
  • Taskforce recommendation: The Taskforce proposes the following with respect to improving diversity on boards and senior management:
    • Require TSX-listed companies to set targets and provide data annually on the representation on their boards and senior management of women, as well as black, indigenous and people of colour (BIPOC).
    • Require TSX-listed companies to adopt a written policy respecting the director nomination process that expressly addresses the identification of candidates who are women and BIPOC during the nomination process.
    • Set a 10-year maximum tenure limit for directors to encourage an appropriate level of board renewal.

Require TSX-listed issuers to have an annual advisory shareholders’ vote on the board’s approach to executive compensation

  • Taskforce recommendation: Adopt mandatory annual advisory votes on executive compensation practices for all TSX-listed issuers. The Taskforce chose not to recommend mandating binding shareholder votes on executive compensation, recognizing the importance of preserving the decision-making process of the board and the risk that shareholder proposal campaigns may become too burdensome on issuers.

Require enhanced, standardized disclosure of material environmental, social and governance (ESG) information, including forward-looking information, for TSX-listed issuers

  • Taskforce recommendation: Mandate disclosure of material ESG information that is compliant with one of two global reporting standards, the Sustainability Accounting Standards Board (SASB) framework or the recommendations from the Taskforce on Climate-Related Financial Disclosures (TCFD).

Proxy system

Introduce a regulatory framework for proxy advisory firms (PAF)

  • The Taskforce recognizes that PAFs play an important role in the proxy voting process. However, issuers and investors have expressed concerns about their influence, potential errors in PAF reports and potential conflicts of interest that may arise from PAFs’ provision of voting recommendations in respect of issuers to which PAFs also provide consulting services.
  • Taskforce recommendation: Introduce a framework for PAFs that would:
    • provide issuers with a statutory right to “rebut” PAF reports where the PAF is recommending its clients to vote against management’s recommendations; and
    • restrict PAFs from providing consulting services to issuers in respect of which the PAF also provides clients with voting recommendations.

Require use of universal proxy ballots for contested meetings and mandate voting disclosure to each side in a dispute when universal ballots are used

  • Taskforce recommendation: Use “universal proxy ballots” – a single ballot that lists the director nominees of each side of a contested election of directors and allows a shareholder to vote for a combination of nominees – in order to provide shareholders who vote by proxy with greater voting flexibility. The Taskforce also proposes mandatory voting disclosure to each side in a dispute where universal ballots are used, to provide issuers and dissidents with greater transparency.

Provide additional requirements and guidance on the role of independent directors in conflict of interest transactions

  • Taskforce recommendation: The Taskforce believes that the best practices for independent committees as described in Multilateral Staff Notice 61-302 Staff Review and Commentary on MI 61-101 should be codified so minority shareholders have greater confidence in the role of the independent committee when an issuer is engaging in a transaction involving a conflict of interest.

Introduce rules to prevent over-voting

  • Over-voting occurs when a reporting issuer’s meeting tabulator does not have documentation establishing that an intermediary is entitled to vote at a meeting as of the meeting record date. If the over-voting is unresolved, the meeting tabulator may reject or pro-rate the proxy votes received.
  • Taskforce recommendation: The Taskforce proposes the following rules to prevent over-voting, which would codify best practices in CSA Staff Notice 54-305 Meeting Vote Reconciliation Protocols:
    • An intermediary must not submit proxy votes for a beneficial owner unless it has confirmed that vote entitlement documentation has been provided to the meeting tabulator;
    • An intermediary that holds securities on behalf of another intermediary must provide appropriate vote entitlement documentation to the meeting tabulator;
    • The reporting issuer and any person that submits proxy votes must be notified if such proxy votes are rejected or pro-rated because of insufficient vote entitlements; and
    • A reporting issuer must obtain the DTC omnibus proxy so that its meeting tabulator can verify the vote entitlements of U.S. intermediaries.

Eliminate the non-objecting beneficial owner (NOBO) and objecting beneficial owner (OBO) status, allow issuers to access the list of all owners of beneficial securities, regardless of where securityholders reside and facilitate electronic delivery of proxy-related materials to securityholders

  • Public issuers in Canada communicate with beneficial owners of securities indirectly through intermediaries that obtain instructions on whether clients wish to be a NOBO or OBO in respect of the securities held in that account. Issuers can mail proxy materials and solicit voting instructions directly from NOBO securityholders, but are currently unable to do so in respect of OBO securityholders.
  • Taskforce recommendation: Remove NOBO/OBO status in Canada in order to enable issuers to solicit voting instructions directly from all beneficial owners of their securities. The Taskforce also proposes that intermediaries provide beneficial owners’ email addresses, along with their physical addresses, to reporting issuers that wish to deliver proxy materials electronically.

Ownership transparency

Decrease ownership threshold for early warning reporting disclosure from 10 to 5 per cent

  • Currently, a shareholder is not required to disclose beneficial ownership of, or control or direction over, voting or equity securities of an issuer until it reaches the 10 per cent threshold. However, the Taskforce notes that 5 per cent ownership is relevant to control of an issuer given that a shareholder can requisition a shareholders’ meeting if it holds 5 per cent of an issuer’s voting securities.
  • Taskforce recommendation: Decrease the shareholder reporting threshold in Ontario from 10 to 5 per cent, and revisit this requirement to maintain harmonization of these rules if changes are made under the U.S. regulatory framework.

Adopt quarterly filing requirements for institutional investors of Canadian companies

  • Taskforce recommendation: Because institutional investors are generally not required to disclose their holdings in Canadian reporting issuers, unless the 10 per cent reporting threshold is crossed, the Taskforce indicated this lack of transparency hinders the ability for issuers to respond to shareholder concerns. The Taskforce proposes adopting a regime that requires institutional investors who own above a certain dollar threshold to disclose their holdings in securities of Canadian reporting issuers on a quarterly basis.

Fund management and product distribution

Although certain recommendations described above will impact participants in the investment management industry, as institutional investors and as distributors of securities, the Taskforce makes a few specific recommendations focusing on the investment management industry:

Access equals delivery model recommendations include investment fund disclosure documents

See our discussion above regarding the Taskforce’s recommendations with respect to adopting full use of the access equals delivery model.

Increase access to the bank-owned dealers’ shelf for independent products

  • The Taskforce explains that an estimated 80 per cent of distribution of investment products to investors is through bank-owned shelf distribution channels and acknowledges concerns about the difficulty of access to such shelves by independent product manufacturers.
  • Taskforce recommendation: The Taskforce supports regulatory initiatives to ensure that bank-owned dealers are not biased towards distribution of proprietary products. The Taskforce recommends that they not be permitted to have closed-product or proprietary-only shelves. Bank-owned dealers should be required to include independent products on their shelves, if requested by an independent product manufacturer, unless the dealer has sufficient rationale not to include such products.

OSC should establish and permit a retail private equity investment fund structure

  • Retail investors may wish to invest in private equity investments, which will assist small issuers who may experience a funding gap for their businesses.
  • Taskforce recommendation: The OSC should establish a retail private equity investment fund proposal and review the “interval fund” concepts operating in the U.S..

Designated dispute resolution services organizations, such as the Ombudsman for Banking Services and Investments (OBSI), should issue binding decisions ordering registered firms to pay compensation to harmed investors and OBSI should have increased compensation limits

  • Taskforce recommendation: Regulatory framework should allow the OSC to designate dispute resolution services, such as OBSI, and make the service’s decisions binding on a registered firm if the harmed investor accepts the recommendation.
    The OSC would oversee the dispute resolution services and ensure necessary changes are made to processes to provide procedural fairness for registered firms and investors. An appeal process will be necessary, with no appeals to be made to the OSC. OBSI should have a one-time increase of its limit on compensation recommendations to $500,000, with subsequent increases every two years based on a cost of living adjustment calculation.

Improving the regulatory structure

The Taskforce is also proposing structural changes relating to the regulatory framework governing the OSC and Canada’s self-regulatory organization (SRO) structure. The recommendations regarding the OSC include expanding its mandate to include fostering capital formation and competition in the markets and separating the regulatory and adjudicative functions at the OSC.

We will be issuing a separate bulletin to discuss the Taskforce’s SRO structural recommendations in conjunction with the various other proposals for change to the current SRO models that have been released in recent months.

The Taskforce does not comment on the longstanding work of various governments to establish the Cooperative Capital Markets Regulatory (CCMR) system, other than to suggest that their proposals may support the work being done in Ontario, in collaboration with its partners to establish the CCMR.

Please contact your BLG lawyer or the authors listed below if you have any questions about the Report, the Taskforce’s proposals, or any of the potential implications for your business.

Key Contacts